The former minister for social services was speaking during a debate on welfare reform, opened by Social Security Secretary Alistair Darling.

She said proposals to reform the system would make it impossible to restore the link between pensions and earnings.

Lady Castle said of the policy paper: "If this goes through, the earnings link will be dead, effectively dead.

Lady Castle: "The earnings link will be dead"

"We'll have a situation in which - as the Tories started to do - we shall have divided our people into those who can afford to pay into some private scheme or are lucky enough to have an occupational scheme on the one hand.

"On the other hand, there will be the paupers, the pauperised pensioners who will be dependent on the safety of the minimum income guarantee, subject to the whims and the generosity of the taxpayers."

Lady Castle said that those who had contributed to the system should receive the benefits without means testing.

Since the abolition of the earnings link, someone who retired then had lost £30,420 - and a quarter of that had gone since the last general election, Lady Castle told delegates.

By 2006, if the new policy was agreed, pensioners would lose another £7,500, she said.

21st century welfare

In his speech, the social security secretary said the government was delivering on its pledges, having restored free eye tests for pensioners, cut VAT on fuel and raised the winter fuel payment.

Mr Darling pledged Labour would deliver a welfare system fit for the 21st Century.

The social security secretary reaffirmed pledges to abolish child poverty and help the elderly, unemployed or disabled.

Mr Darling: Acknowledge welfare reform was difficult

Mr Darling promised full consultation over reform of the welfare state.

He said: "I intend to engage in that debate over the next few weeks and months, which will be grounded in our fundamental values."

Mr Darling continued by acknowledging that reform of incapacity benefit was difficult, but he insisted: "It's got to be done."

The government's attempt to reform the benefits resulted in the largest backbench revolt since Labour came to power.

Mr Darling said: "I know reform of incapacity benefit is difficult, but it's got to be done.

"Let's nail the lie that we're cutting spending on disabled people.

"We're not. The truth is we're spending £2bn more this parliament."

Mr Darling announced in the speech that parents on low incomes who take parental leave will receive benefits.

Under the government's employment relations legislation, passed in the summer, parents will have a statutory right to unpaid parental leave for three months and time off for family emergencies.

Under current rules, only lone parents are eligible for Income Support when on parental leave.

The government proposes to extend this to low-income couples, Mr Darling told conference.

The new measure will cost £1.5m and will affect about 2,500 people.