A group charged with finding ways to overhaul the benefit system says sickness and invalid beneficiary numbers are increasing despite better health among the general population.
The Welfare Working Group is considering suggestions by Treasury that benefits for the sick and disabled be reclassified to decide how much work they are capable of.
Working Group chairwman Paula Rebstock says people's health and life expectancy are improving, but the labour market has become more competitive and less open to sick or disabled employees.
Ms Rebstock says job-seekers with a reduced capacity to work due to an illness or physical impairment are finding it increasingly hard to get into the labour market or sustain their work.
She says that despite this challenge, there still needs to be a focus on how much work they can do, because the longer they are on benefits, the worse their job prospects will be.
About 85,000 people are on invalids benefit and a further 58,000 are receiving a sickness benefit.
Meanwhile, the number of people being moved from Accident Compensation Corporation payments to welfare benefits is rising as the Government tries to reduce ACC's costs.
Figures from the Social Development Ministry show the number of people applying for benefits who said their last income was from ACC payments climbed from 47 people in April 2007 to 185 in September last year.
In the past five years the number of people on invalid benefits has risen from 73,000 to 85,000 and sickness beneficiaries have jumped from 45,000 to 58,000.
The Green Party's ACC spokesperson, Kevin Hague, says people are being shifted to cheaper welfare benefits to make ACC's books look healthier.
ACC Minister Nick Smith says there has been no increase in the number of people asking to have their case reviewed after being moved off ACC.