The biggest changes apply to some solo parents in an apparent bid to cut down on what Mr Key once described as "breeding for a business" - solo parents who had more children, qualifying them for a larger benefit.
Mothers who have further children while on the benefit will have to look for work when that child turns one.
Other single parents will have to look for part-time work when their youngest child turns five, and full-time work when the youngest child is 14 - the age at which a child can be left unsupervised.
Those on sickness benefits will also be required to look for work and will be given money for medical help to speed their recovery.
Social Development Minister Paula Bennett said the welfare system had supported sole parents until their children were 18. That would change to 14.
Ms Bennett said that of the 131,000 sole mothers in New Zealand, 30 per cent were in full-time work and half of those had children aged over 14. About one third of solo mothers with children aged between 6 and 13 worked full time.
"Society's expectations have changed and the benefit system needs to change with them."
She said the $1 billion saving was ambitious and the new system would take time to bed in.
Mr Key said the present system was passive.
"For the most part, it simply hands over benefits and leaves people to their own devices. Most beneficiaries are not expected to be available for work or to take up work when it is offered to them. Naturally, many don't."
The level of benefit payments would not be cut and would continue to increase with inflation. But sanctions in the form of cuts to payments would apply if beneficiaries did not meet their obligations.
The changes are less severe than those recommended by the Welfare Working Group, which proposed that all solo mothers be required to look for work when their youngest child was three and those who had further children should have to start looking for work when the baby was 14 weeks old.
But national's rivals yesterday attacked the changes as unfair, especially when jobs were hard to find.
Labour leader Phil Goff said it was an admission of failure by National. Beneficiary numbers had increased by 60,000 under its watch.
"Fiddling with the welfare system and penalising parents won't create the jobs. All [National] is proposing is to rename benefits and tell parents with children to get back to work. What you have to do is give them jobs to go to and affordable childcare."
Maori Party co-leader Tariana Turia said welfare dependency was bad for Maori, but the party would watch closely to ensure that the most vulnerable - including the disabled and children - were not punished by the changes.
