The benefit paid to 2.7 million sick and disabled people is to be overhauled to remove disincentives to return to work, the government has announced.
Ministers say they want those who can work to do so
Work and Pensions Secretary Alan Johnson told MPs the name Incapacity Benefit would be scrapped.
There would be a new scheme for those with the most severe illnesses and another to get about one million claimants back to work.
The Tories and Lib Dems say the reforms fail to tackle the real problems.
Disability campaigners welcomed extra support to help people return to work but they are worried that some disabled people could be made even poorer.
Mr Johnson said his proposals were the "biggest change in benefit for sick and disabled people" since the foundation of the welfare state.
Society had a responsibility to care for those unable to work, he argued, but as many as a million people on Incapacity Benefit wanted to return to employment.
Incapacity Benefit to be scrapped along with automatic rises in payments for claimants after six months and a year
People with worst conditions to get new Disability and Sickness Allowance
Most claimants to move onto new Rehabilitation Support Allowance - a flat rate of about £55 but extra money for those trying to return to work
Announcing his reform plans, he said it did not make sense to "lump" the two groups together.
He wants to remove the "perverse incentive" for those able to work again to stay on the Incapacity Benefit as it rises from just under £56 a week to £74 after a year.
The new system would give people a holding benefit - the same as the £55-per-week Jobseekers' Allowance - until they were assessed by a doctor.
The 20% of claimants with the worst conditions would receive a new Disability and Sickness Allowance, worth more than the current incapacity rates.
The rest would receive a flat rate Rehabilitation Support Allowance worth about £55.
But they would get extra money for attending work focused interviews, training and rehabilitation.
The scheme would not affect existing claimants, who would continue drawing Incapacity Benefit.
Mr Johnson said he wanted to ensure the "nine out of 10" claimants who want to get back to work quickly were able to do so.
"What happens at the moment is that if they are on it for a year, they will be on it for eight years, and if they are on it for two years, they will retire or die on incapacity benefit," he said. The benefits changes are due to come into force by 2008.
Conservative shadow work and pensions secretary David Willetts said previous reforms had never materialised.
Ministers were mimicking the film Groundhog Day by "making the same promises on welfare reform that it has made again, and again and again", he said.
Liberal Democrat spokesman Steve Webb said there was no research showing that the current payments encouraged people to stay on benefits.
"Many people with health problems have good days and bad days, meaning that sometimes they can work and sometimes they cannot," he added.
Disability Rights Commission chairman Bert Massie said the changes would help if they included high quality support.
He warned: "It is important that people on incapacity benefit who cannot do paid work are not penalised financially or made to feel guilty."
Sixty-five Labour MPs rebelled against planned reforms to Incapacity Benefit in 1999.