With the recent economic crisis threatening current entitlement programs in the US and Europe, I believe that it has become clear that we cannot solve 21st century problems with 20th century economic models. We need to take a new approach to the way government acts to supply the demands of its citizens. We need to embrace new technology and a better understanding of human psychology, where older economic theories were based on an outdated understanding of human nature and limited by technology.
We should replace the social welfare state with an online social welfare network. States are large, impersonal, inefficient when handeling funds, and slow to change. Networks are defuse, interpersonal, efficient at transfering funds, and dynamic. Many of the ingredients are presently available. There are allready online social networking sites such as Facebook and Google plus, and fund transfering services such as PayPal. This way taxpayers can subsidise recipients, individuals or organizations, directly in exchange for tax credits.
Psychologist Paul Slovic and coleauges conducted studies measuring levels of human empathy and discovered that human empathy reaches its maximum when directed at a single human being and deminishes when concerning greater populations.  This explains many peoples difficulty with empathizing for the abstract number of people who are currently dependent on the welfare programes. By giving tax payers an face-to-face relationship with the recipient of their tax money, either through the actual individual or a represenative for a group or organization, that would exploit the maximum empthetic capacity of every citizen.
Taxpayers who give more then their government mandated share can be awarded with special honors and awards. A rankings list can be maintained displaying profiles on the most generous citizens.  Since the currencies of attention and reputation are as strong a motivator online as monetary currencies people will compete to out-do others in the relm of assisting other people. 
There would need to be a third-party to confirm the identity of the recipient. And considering that there are a lot of people who do not have access to the internet or own personal computers there would need to be a way for these people to access the network.
There would need to be individuals who have priveleged access to the network and mediate the exchange of funds. Current public locations, such as schools, universities, libraries, and post offices. Since the post office is in financial trouble they can be especially useful as retrofitted welfare network access points, considering they are allready a nation-wide network.
In order to garuntee that there is no fraud and that the maximum value is being spent.
Organizations that recieve welfare funds should have to disclose their financial records for public knowledge. And individuals who recieve funds should attend regular peer-group meetings that reinforce their financial obligations. Grameen Bank has had tremendous success with peer-group reinforcement as a means to get their borrowers to repay their loans. They maintain a repayment rate over 95% despite the majority of their barrowers to poor women without collateral. 
1. This is the example I drew from Sam Harris’s “The Moral Landscape”. He suggests that these discoveries concerning human empathetic capacity should signal us to “build our better selves into our institutions, laws, and tax codes.”
2. Anyone familiar with Kiva.org will be able to identify their model of competitive lending. As it turns out the atheists lead the Christians for the most generous members of Kiva (http://www.youtube.com/watch?v=aEC3OwKWgfc)
3. Chris Anderson, the editor of Wired Magazine, is also the author of the book “Free: The Future of a Radical Price”, the audiobook of which can be downloaded off of iTunes and Audible.com for free! (it is a great book which I highly recommend) In that book he explains how many internet based companies have been able to make a business model off of giving things away for free. One of the variety of models is what he describes as the “Labor Exchange” where users willingly submit their time and energy to improve a service and expect no repayment except for the attention and reputation they receive in return. (think Wikipedia and the movie listings on IMDB)
4. Economist Muhammad Yunus won the Nobel Prize for creating a method by which the poor can receive loans without collateral. He is the author of several books “Banker to the Poor” (his autobiography), “Creating a World Without Poverty”, and his most recent “Building Social Business”.