The government yesterday unveiled ambitious plans to overhaul the retirement system including proposals to make people work until they are 68 and encourage them to save in an effort to defuse a future pensions time bomb.

In a statement to the Commons, the pensions secretary John Hutton said he plans to make the basic state pension more generous by re-establishing the link with earnings within the next parliament. The means tested pension credit, which has come under attack for excluding an estimated 1.6m pensioners on low incomes, would be restricted.

Proposals for a low cost savings scheme with automatic enrolment for staff and compulsory employers' contributions would further encourage private saving.

Mr Hutton said the changes, published in a white paper Security in Retirement: Towards a New Pensions System, met the challenges posed by increasing life expectancy, an overly complex state system and a lack of private saving. "I believe it can lay the foundations for a lasting solution to the pensions challenge we face."

Government figures show that spending on pensions and pensioner benefits accounts for 6.3% of national income. By 2050 reforms will take the total to 7.8%.

The white paper is the government's response to Lord Adair Turner's pensions commission. In three reports the commission examined the pensions system and made recommendations for reform. Initially Lord Turner was asked to advise on how to encourage private saving, but he quickly widened the scope of his study to include the state system, which he said provided disincentives to save through complex means testing and regulation.

The commission concluded that unless the state pension was overhauled and private savings boosted, millions were headed for poverty. A recent study showed that workers on average faced a drop in income of 60% when they retired.

The Treasury initially claimed Lord Turner's proposals were unaffordable. But pressure from unions, backbench MPs and some sections of the business community persuaded the chancellor that he needed to side with Lord Turner.

Lord Turner welcomed the government's proposals, saying it planned to implement 95% of his recommendations. The main recommendations are for the state pension age for men and women to increase to 66 in 2024, to 67 in 2034 and 68 in 2044 and for the basic state pension to be tied to earnings rather than prices;

In addition the government will end contracting out from the earnings related state second pension for 3m workers in occupational schemes.

The move will provide savings now on contributions the government would otherwise have given to occupational schemes. Workers will receive the benefit from the government in the future rather than their employer. Contrary to some reports, the government said no-one would lose out by this measure

The lifeboat scheme for workers who lose their pensions when their employer goes bust is also to be expanded. Mr Hutton said the three year limit - which provides compensation for people three years from retirement - would be extended to 15 years, giving a boost to an estimated 30,000 workers.

Mr Hutton said the proposals would promote personal responsibility for retirement savings, be simple, affordable fair and sustainable. But critics said the plan would be rejected by large numbers of workers.

Ros Altmann, a former pensions adviser to No 10, said the reforms still left an overly complex system that most people would find difficult to understand.

The basic state pension would continue to rely on accumulating national insurance contributions rather than switching to a simpler residency test preferred by most pensioner groups and the Liberal Democrats. She said means testing would remain a significant factor in calculating whether it was worth workers on low incomes saving in a private pension.

Tom McPhail of financial adviser Hargreaves Lansdown said the government would still need to persuade large swaths of middle England that saving more and working longer was a viable option when many of them had accumulated large debts and were in danger of bankruptcy. A report this week said 1 million people were in danger of becoming bankrupt after taking on large mortgages and loans.