Centrelink's debt recovery system has seen more than 200,000 people receive letters asking them to clarify their finances in connection with suspected overpayments.
Thousands have been billed for debts that were later reduced and sometimes revoked altogether.
The question Labor senator Murray Watt wanted answered in a Senate committee hearing was, "how many people went ahead and paid debts they did not really owe?"
"This system should be put on hold immediately. It is fundamentally flawed. It is hurting people all around the country. We're still seeing something like 20,000 of these debt notices sent out to Australians every week."
Senators grilled top bureaucrats from Centrelink's parent department - the federal Department of Human Services - over the scheme, which has been widely criticised for sending out inaccurate debt notices.
The agency's computer algorithm cross references Centrelink welfare payments with Tax Office income data to identify apparent discrepancies.
The Department says around 20 per cent of those who received letters about a possible mismatch ended up not needing to pay any debt.
Thousands were billed for a debt, but subsequently had the amount reduced, in some cases to zero, after providing further evidence.
Human Services Department Secretary, Kathyrn Campbell, admits some changes need to be made, but stands by the program.
"The view of the Department is that there are a number of refinements that needed to be made, those refinements are being made, and that the system should continue."
Ms Campbell says the refinements include sending letters via registered mail, using simpler language, and introducing different colours on the online portal.
Letter recipients will now have 28 days to provide clarifying information rather than 21.
Centrelink will also 'pause' debt recovery operations while claims are under review.
But the union that represents Centrelink staff is unimpressed.
The Community and Public Sector Union's Nadine Flood says workers have received more abuse from clients in financial stress.
"It is not an exaggeration to say that the Department of Human Services is an agency in crisis, and it's not something I say lightly."
There was more criticism from social service organisations, too.
Susan Helyar is the director of the representative body, the ACT Council of Social Service.
She told the Senate committee many of her colleagues believe the debt recovery mechanism is designed to have a chilling effect on social security recipients by making Centrelink difficult to access.
"They're being discouraged from exercising their entitlements in the income support system by this poor public administration. And some people cynically suggest that perhaps that may be the point."
The Human Services Department head Kathryn Campbell has accused critics of not providing specific recommendations on how the scheme could be improved other than a full return to manual debt handling, with a person reviewing every case.
