Labour says a culture within WINZ which has "created two classes of New Zealanders" is preventing beneficiaries from getting what they're entitled to.
Social development spokesperson Carmel Sepuloni made the claim on Saturday morning, during a debate with her National Party counterpart Anne Tolley on The Nation.
About $200 million of entitlements each year go unclaimed, documents obtained under the Official Information Act by The Nation show. Ms Sepuloni said they show payments are being withheld from beneficiaries.
"I think they're overstretched in terms of the demand that's on them. You've created two classes of New Zealanders - the deserving, and you're looking at beneficiaries as if they're undeserving and they don't want to work."
But Ms Tolley said it was a complicated system.
"I've been in offices up and down the country and the staff gets up every day and come to work to make sure they are giving that assistance to people who need it. I think it's a real indictment on the staff. Do they make mistakes from time to time? Yes".
Ms Sepuloni said the system was too complex.
"We should not need Auckland Action Against Poverty to run workshops to inform people about what they're entitled to," said Ms Sepuloni. "That information should be provided by people when they go to a WINZ office."
National promised tough new sanctions on beneficiaries earlier this week, stating it'll slash benefits in half for young people who refuse drug rehabilitation, training or work experience.
Critics say the sanctions are just beneficiary-bashing, but National says sanctions work.
Ms Tolley said there were two types of people they supported.
"There about 93,000 people who have a severe disability or illness that means we want to support them, we don't expect anything of them.
"But we do have a significant number who are looking for work and who are capable of working, so for most of them it's just a light touch to help them along the way."
When an employer places a job ad within WINZ, they can ask that applicants pass a drug and alcohol test.
Ms Tolley claimed earlier this week one-in-five beneficiaries said drug use was standing between them and a job. She told The Nation she did not know how many beneficiaries across the four offices surveyed were asked, but confirmed wasn't a scientific study - calling it a "snap shot" of the current situation.
Both Ms Tolley and Ms Sepuloni ruled out adopting the Greens' proposal of raising base benefits by 20 percent.
Ms Sepuloni said Labour would take a look at the current benefit sanctions regime, saying the vast majority of sanctions were being applied to missed appointments and breakdowns in communication.
Uptick in hardship grants
But with $78 million in hardship assistance given out, is the system failing?
There has been a 34 percent increase in hardship grants, including $11.5m for food, $7m in health - like doctor visits - and $2.5m for electricity.
Ms Tolley said each individual has a different story.
"We do our best- we have about 7000 staff who deal with 1.7 million a year; 120,000 have an individual case manager who they have to meet with every 28 days, and they do their best to get what they're entitled to."
But Ms Sepuloni said the system is not working.
"Some accessing these hardship grants are on a benefit - some are the working poor, struggling to survive."
She said it was the "same old, same old from the Government".
"The Government's response has been to push people off benefits with no regard for whether or not they'll in fact be better off.
"This is why we want to focus on upskilling and training, rather than just pushing people into the next minimum wage job that comes along."
But Ms Tolley said the best way to get people out of poverty was though employment, and that they made the process easier by applying over the phone.
"I agree at times it's too bureaucratic. Now 60 percent of applications are done online, and we provide cheap data to do it on their phone."
But Ms Sepuloni said a report this year showed that 25 percent of people were back on a benefit within two years and the Government isn't thinking long-term.
National has a goal of reducing the number of beneficiaries by 25 percent 10 months' time - that's 56,000 people off the benefit.
Ms Tolley said the party aimed to achieve this by working closely with employers, but whether they would reach that target remains to be seen.
"If you don't put an aspirational target out you keep on doing the same things."
But Ms Sepuloni described it as "a crude target just to get people off".
Labour says it will track former beneficiaries' outcomes, saying the current Government hasn't been.
But Ms Tolley said tracking people was awful.
"There's a whole lot of people who don't want the state interfering in their lives. Tracking people is awful - they go off the benefit for a variety of reasons.
"Forty-four percent of people self-identity as going into employment once they go off a benefit. We track if they go back on a benefit, and we do have a close look at what happened."