The Labour Party is calling on the government to change the law so that compensation for people abused in state care does not affect benefit payments.
A man who was abused in state care as a child, and given a $20,000 settlement a few weeks ago, argued he could not save the money for himself or his children because his welfare payments would then be reduced.
He told RNZ yesterday it gave abuse victims an incentive to spend their entire compensation payment so they could continue earning.
The Ministry of Social Development said benefits were not asset-tested, but some other welfare payments such as accommodation supplements were.
Labour social development spokesperson Carmel Sepuloni said the law made no sense.
"These are people that have been abused whilst in state care and they've been penalised," she said.
"There needs to be a review of hwat that law entails and as labour's social development spokesperson I certainly would be proposing that some changes be made."
The Human Rights Commission said it was working on the issue on a range of fronts.
The government has so far denied there is a need for an inquiry in abuse of children in state care, arguing it would not help any more than what has already been done to redress the wrongs.