The government has released a blueprint for long-term welfare reform, with changes for disability support pensioners and young people.
Young people will have their welfare managed and people with a disability will be moved off the pension under proposals before the federal government.
But the government has promised the changes won't be felt for some time and the community will get a say.
Social Services Minister Kevin Andrews has released an interim report into welfare reform, arguing the system is unsustainable and complex.
The report calls for welfare payment categories be culled from 20 to just four: a tiered working-age payment, a disability support pension, an age pension and a child payment.
People with a disability will be moved onto the working-age payment along with jobseekers, parents and carers, with top-ups based on need.
Only those with a permanent impairment and no capacity to work will get the disability support pension.
Mr Andrews said the "set and forget" payment did not recognise people's ability to work and many people claiming the payment had episodic psychological illnesses.
But disability advocates said those were simplistic assumptions about individual circumstances.
Some people with permanent disabilities could work, where others without permanent impairment could not.
"These things are complex and there are grey areas," People With Disability Australia CEO Craig Wallace told reporters in Canberra on Sunday.
There's also a strong focus on jobless families and children at risk of long-term welfare dependency.
A new child payment could replace Family Tax Benefit Part A, Youth Allowance, Abstudy and other payments.
Young people from disadvantaged backgrounds would be expected to undergo early intervention programs focused on education or training.
They would also be subject to income management to stop them from buying items such as alcohol.
Welfare advocates cautioned against what it labelled "social engineering", in using welfare compliance to influence family circumstances.
"We urge the government to not go down this path," Australian Council of Social Services CEO Cassandra Goldie said.
The government will give six weeks for community feedback, after which a final report will deliver recommendations in September or October.
Mr Andrews said the report was the first step in a long process of reform.