I realize the need to prevent fraud but there has to be some kind of balance to allowing someone in a bad situation to keep a little dignity.On the contrary, that would be counterproductive.
At low levels of income, there is virtually no relationship between earnings and consumption. So if a person's utility function is proportional to consumption, with a slight disutility for working, they will choose not to work.
This happens in the US up to the $30k/year level - i.e., a person earning $0k/year and a person earning $30k/year will consume roughly the same amount of goods and services.
http://crazybear.posterous.com/why-the-poor-dont-work
However, if you make receiving food stamps/welfare/etc unpleasant (i.e., more unpleasant than actually having a job), you would encourage some people to work for a living instead.