By making it bigger to 3.7 inch they would still be over 300 dpi thus maintaining "retina" terminology.
And realistically 960 x 640 for a 3.7 display is still great and i doubt someone would go "oh the display sucks now".
Whilst it would provide more screen space and such, it would be a HUGE nightmare for developers.
They won't do it so don't get your hopes up.
It would mean apps would increase in file size even more due to having to ship graphics in yet another size:
- Original Size (e.g iPhone 1 to 3G
- Retina Size (3x gfx for iPhone 4)
- New Retina Size (For iPhone 5)
- iPad Size
and likely iPad Retina Size by next year.
Doesn't sound like much, but trust me, as a developer thats a huge pain in the ass. I've got an app that has photos for over 200 restaurants. That'll mean I have to create over 800 photos just to get the images looking ok on all the devices. Thats not even taking into account having to provide additional code to resize apps to fit on the different resolutions (wasn't a problem with the iP4 as it was done automatically with a simple 'x2', however if you throw in a completely new resolution, it'll screw up every app in the appstore).