Prime Minister John Key says he expects to make further changes to the welfare system.
A paper from the Welfare Working Group, set up by the Government to look at ways of reducing welfare dependency, says the current system is out of date and unworkable.
The Social Assistance (New Work Tests, Incentives, and Obligations) Amendment Bill currently before Parliament would put in place welfare changes already announced, such as work testing parents on the domestic purposes benefit when their youngest child turns six.
The Prime Minister says those reforms will improve the benefit system, however, the issue of long-term welfare dependency also needs to be looked at.
Mr Key says the Government owes it to the taxpayer and beneficiaries to ask the hard questions about whether the settings are right in the welfare system.
"Because the same people that will argue this - I can assure you - are the same people that raise child poverty statistics in New Zealand, and let's understand those.
"The vast bulk of children in New Zealand who grow up in a poverty defined household come from a welfare defined household."
Report criticised for narrow focus
The Welfare Working Group report, which concludes the welfare system is outdated and unsustainable, is being criticised as having a narrow focus.
The report says an increasing number of people are becoming benefit dependent - especially those receiving sickness, invalid and domestic purpose benefits. It says the system does not provide enough support for those on benefits to work.
The group's chair, Paula Rebstock, says a lack of emphasis on job seeking and personal responsibility leads to long-term disengagement from the workforce.
Business New Zealand and the National Distribution Union (NDU) say employers and unions must be involved in ing a long term solution.
Business New Zealand chief executive Phil O'Reilly told Nine to Noon the Government must design a welfare system that works in the real world, and needs to consult employers over things like whether the required jobs exist.
NDU president Robert Reid says the group needs members on board who actually know about the workplace, and it must be established whether there enough jobs for those it is proposed might come off benefits.
Overhaul needed, says Rebstock
The Welfare Working Group says that in 1960, just 2% of the working age population were on some kind of a benefit. That figure now stands at 13%, and, if nothing changes, will be 16% by 2050.
Ms Rebstock, formerly head of the Commerce Commission, told Morning Report the system is due for an overhaul, as it has remained relatively unchanged for a long time.
She says part of the reason an increasing number of people are stuck in long term benefit dependency, especially those receiving sickness and invalid's allowances, is that some conditions are over-medicalised.
"When you look at the evidence on this, both in New Zealand and overseas, what we see is the medical conditions that people often have when they're on benefit look very much like medical conditions of people in work."
She says child poverty rates would be improved by getting more people into work, including solo parents.
The group also found that the education system is failing many people and making them unemployable.
The group says the welfare system could learn from the insurance industry, which gives providers and individuals incentives to reduce the chances of things going wrong, and early intervention to minimise the consequences.
'Unemployment behind rise'
Former Green MP and member of the Alternative Working Group, Sue Bradford, accuses the Welfare Working Group of helping the Government manufacture a crisis and says a rise in unemployment is behind the increase on benefits.
Ms Bradford adds the Working Group is slavishly following what the Government wants to do, which is aiming to push people back to work - ready or not - and regardless of whether the work is appropriate.
Public submissions on this report close in September.