The aim would be to get at least one person per household into work
Proposals to allow low-paid people to keep benefits longer and to streamline the system have been published by a think tank set up by Iain Duncan Smith.
The Centre for Social Justice says the system makes it hard for people to earn more at work than they get in benefits.
The ex-Tory leader proposes merging 51 benefits into two and subsidising the low paid, at a cost of £2.7bn a year.
Tory leader David Cameron said it was a "very interesting" report and said the party would "study it carefully".
It is not official Conservative policy but Mr Cameron said many of the proposals were "good initiatives" and showed the "big thinking" that was coming from the centre right.
Meanwhile figures from the Office for National Statistics show unemployment in the UK rose to 2.47m in the three months to July.
Mr Duncan Smith's report suggests its proposals would get 600,000 households into work.
He says the current numbers of benefits need to be cut because the system is too confusing and no-one knows what they are meant to be receiving.
The two categories should be one dealing with work and one with "life requirements", which would make it easy for people to see what they were receiving in total benefits.
The report says claimants taking a job paying less than £15,000 a year are currently worse off than if they remained out of work.
People are being put off from going for jobs, it argues, and benefits should be removed gradually by lifting the income threshold at which they are phased out.
Shirley Forest, 36, South London
Shirley has been unemployed since falling ill four years ago and is looking to get back into the care industry.
She says it is hard to find a job that makes it worthwhile coming off welfare, especially when many are so low paid.
"You're worrying about 'can it cover the housing, can it cover the council tax, water rate and so on' and just the sociable bills as well," she said.
"It's quite worrying to see if you're going to get the right benefit out of a job."
She said the prospect of finding employment but still having to scrape to make ends meet was "scary" but had not put her off.
"It's a bit of a trap because... anybody can get a job but it's just like 'can it cover your day-to-day expense'?"
Mr Duncan Smith told the BBC the key thing was getting people to make the decision to go into work in the first place by making sure "work pays" and helping people develop a "work habit".
"The benefits system right now is so complicated and out of control that every prediction that every politician has ever made about money that they put in is wrong," he said.
"We believe that if you want to end child poverty, if you want to help people then you need to be able to help the worst off best, and you need to be able to help them do the most important thing in their lives - which is that we believe every household should have work."
The report says the proposals would cost £2.7bn a year - on top of the £74bn already being spent on benefits.
Bur Mr Duncan Smith said the potential savings in terms of administration, as less staff would be needed to run the system, and the social cost of worklessness - including health and crime, were "dramatic". The report estimates it could be £3.4bn a year.
The report says its proposals would benefit low-income households by £5bn and lift 200,000 children out of poverty but that middle-income families would see "modest" falls in certain tax credits.
It was important to reduce Britain's "residual unemployed" - people who do not work even in better economic times, he said.
"That is critical and that changes society," he told the BBC.
Working couples should get more financial help, especially those on low wages, the report says, but families on incomes of £30,000 will see entitlements cut.
It also proposes changes to ensure people who save or who own their homes are not penalised by the benefits system.
The right-leaning body says help should be concentrated on getting at least one person in each household into work.
The Tories say their welfare reform proposals are focused on getting people back into work and have pledged to review the status of all those on incapacity benefit.
The Lib Dems say more than £1.3bn could be saved by reducing the amount of family tax credits paid to better-off families.
For the government, welfare reform minister Jim Knight said: "Where on earth does Iain Duncan Smith get the billions of pounds for this when David Cameron wants to cut billions in public spending right now?
"And how would this help anyone into work if the Conservatives also want to cut support for the economy and the help to get people into jobs?"
He said the Labour government had reformed the benefit system to get more people into work and reforms like the minimum wage and tax credits had made "work pay".
Debbie Scott from Tomorrow's People, a charity for the long-term unemployed, said many benefits stopped the moment a job started, leaving many struggling to earn enough to pay the rent and get through the first month.
"In people's minds it's a real issue that they don't want to take the risk because if they can't pay their rent they could become homeless and also they could get into debt," she said.