The leading thinktank said proposals to make certain mental health and neurodevelopmental conditions ineligible for personal independence payments (Pip) would be "crude changes" aimed at hitting unrealistic savings targets.
However, it warned that Pip was "failing on several fronts" and called for a major overhaul to keep a lid on costs, currently rising at an "unsustainable" rate, and to restore public trust in a benefit widely seen as unfair and dysfunctional.
About £4.4bn a year could be saved if support was better targeted, the thinktank said. Cash support could be removed from an estimated one in six working-age claimants, around 670,000 people, who report having no extra costs as a result of their disability. But it added that reforms should proceed with caution because of Pip's success in enabling many disabled and ill people to take part in "economically valuable" activities such as work, caring, training or volunteering.
Spending on Pip in England and Wales has risen by 183% in real terms since it was introduced in 2014. The bill is expected to reach £28bn this year, rising to £34bn by the end of the decade, according to official forecasts.
An attempt by the previous Labour administration under Keir Starmer to push through £5bn of savings collapsed last year amid a backbench rebellion. His successor, Andy Burnham, has said renewed attempts to reform benefits would not involve "crude cuts".
Welfare officials, awaiting an official review of Pip by welfare minister Stephen Timms and the Milburn review of the youth jobs crisis, are understood to be considering proposals to exclude under-25s from the system. The benefit has also become a culture war issue, with some, such as Tory leader Kemi Badenoch, arguing it should not be paid to claimants with "mild" conditions.
The Resolution Foundation said attempting to link Pip awards to particular conditions was simplistic and impractical, as most claimants report multiple conditions, often combining physical, mental and behavioural ones.