Prime Minister John Key has outlined an overhaul of the welfare system that will require more people to look for work and take jobs when offered.

The new system will scrap the old benefit titles and put beneficiaries into three new categories, depending on their ability to work.

Only those with terminal illness or who are seriously debilitated will not have to undergo work testing.

Mr Key said about 12 per cent of the working age population was on a benefit and that was not sustainable.

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All of those currently on the unemployment and sickness benefits will be put on a new 'Jobseeker Support Benefit,' and required to look for full time work. Single parents with children aged over 14 would go on the same benefit.

Parents on the domestic purposes benefit would instead get 'Sole Parent Support' until their youngest turned 14.

Solo parents would be required to undergo work testing when their child turned one and would be expected to work at least part time when their youngest was five.

The term 'invalids benefit' would also be scrapped and those with permanent, severe disabilities and terminal illnesses would instead receive a "supported living payment."

They would not face work obligations.

The changes are expected to get 46,000 people off the benefit. It would cost $130,000 a year in extra support but was expected to save $1 billion over four years. The changes would be implemented from next year and completed in 2013.

Mr Key said it was hoped the changes would alter the attitude to the benefit and reduce long term dependency.

He said the government would spend money to get people ready for work - including on child care, and health.

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"We are prepared to make an upfront investment because the payoff is a better life for beneficiaries and their children and, over time, a reduction in the long term costs of welfare."

He said the current system was "passive."

"For the most part it simply hands over benefits and leaves people to their own devices."