The benefits budget should be under the control of local councils, Andy Burnham has said.
The Labour leadership candidate said he would devolve the Department for Work and Pensions (DWP) budget to local authorities if he were Prime Minister.
Mr Burnham said councils would do a better job of getting people back into work than the current "top down, dehumanised" welfare system.
During a Guardian leadership hustings in central London, the shadow health secretary said: "We've got a dehumanised DWP regime that is there to punish people, there to sanction people.
"That is the way in reality it comes down on the ground, where the staff in DWP are incentivised to apply these sanctions.
"I think we need a radical reshaping of how this system works.
"What I would do - I would give the DWP budget to local authorities, I believe they would do a better job of getting people back into work, of supporting people at a local level.
"I think we need a radical change to this top down, dehumanised approach that doesn't support people, it just seeks to punish them."
Mr Burnham also said he would give the Scottish Labour Party more power to set out their own positions on issues like welfare to win back voters north of the border who have drifted to the SNP.
The Leigh MP said: "If I am leader I will put powers through conference this year to give the Scottish party more autonomy, to give (leader) Kezia (Dugdale) more autonomy over issues like benefits for instance.
"Because Scottish colleagues wanted to campaign against the bedroom tax a full year before Westminster Labour gave them the permission to do that, we can't have that again."
Meanwhile, his rival Jeremy Corbyn appeared to backtrack from his call for Britain to leave Nato, saying there is no public appetite to pull out.
Earlier, he told a Daily Mirror hustings "I would argue for Nato to restrict its role. I don't think there's an appetite as a whole for people to leave Nato, I want to see Nato under much more democratic control."
He added: "It's a Cold War organisation, it should have been wound up in 1990.
"It's now given itself a global role and requires all its members to pay 2% of GDP.
"I would have a serious debate about the powers of Nato."
Mr Corbyn also reiterated his position that he would seek to empower members in Labour's policy making process and spread power away from the shadow cabinet and MPs.
He told the Guardian hustings: "I don't think we can go on having policy made by the leader, shadow cabinet, or Parliamentary Labour Party. It's got to go much wider. Party members need to be more enfranchised."
Mr Corbyn added: "Whoever is elected will have a mandate from a large membership."
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