The Victorians had the concept of the Deserving Poor versus the Undeserving Poor, which is basically how welfare systems ought to work in general. The Deserving Poor are those that suffer from misfortune that brings them to poverty yet are otherwise virtuous people, while the Undeserving Poor become poor due to vices, bad decisions, and otherwise being a subhuman subhuman in the original sense of not being capable of maintaining the society they live in rather than being the "wrong" race.
There are two ways to tell the groups apart. The easiest way is to examine what happens if you give them resources. The Deserving Poor will use those resources to lift themselves out of poverty or, at the very least, use it to enable their virtuous contributions to society. We can see the Deserving Poor in the sorts like a farmer whose barn burns down and, upon receiving aid from his neighbors to rebuild it, restarts production on his farm. Or the widow who is raising children receiving enough assistance to allow her to give her children enough to eat and an education so they won't run the massive risk of becoming criminals.
Contrast this against the Undeserving Poor who, upon receiving resources from charity, fritter it away on frivolous luxuries, habits, and vices. The Undeserving Poor got into their situation largely because they misused resources, and giving them any more will be at best wasteful, and at worst destructive. Examples include the panhandlers who use your donations to buy booze and drugs, or the Indians on reservation who wait around for government checks to then waste on casinos and drinking.
As for figuring out who is Deserving or Undeserving before you give them money, it's a matter of examining their virtue. This can be done through examining their reputation, history, and current observation. You can give them a test bit of welfare to see if they respond in a Deserving or Undeserving manner, and upon figuring that out treat them accordingly. It takes human discretion though - no current mechanism of government or law exists that can conduct this process, hence why charity is best done by human-centric organizations.
What do you do with them? In short, you give resources to the Deserving Poor, and withhold them from the Undeserving Poor. That doesn't mean starving out the latter since that often doesn't help - they turn to criminality and other parasitism otherwise - but containing them, their vices, and sequestering it away from the general public. This is attempted today in the form of soup kitchens and homeless shelters, but these only attract and maintain larger homeless populations in most cases and gravely damage nearby communities. The original idea of the asylum, where these kinds of hazardous-yet-not-criminal elements could be sequestered out of society and in a nice place that they could have the chance to heal, is what is called for in borderline cases. Those who are completely subhuman just need to be encouraged to stay in a manageable area, not breed, and run out their lifespan while doing as little damage as possible to society.
Welfare today is badly mismanaged because it neither differentiates properly between people nor approaches the problem in ways that encourage recovery. The former is self-evident from how jobless Shaniqua and her fatherless brood of future criminals are supported at every turn by the state. The latter is more subtle, but an example would be replacing food stamps with preset ration boxes filled with nutritionally-sound but utterly bland food. When I say utterly, I mean hardtack levels of tastelessness. A person could eat it and be healthy, but not happy whatsoever. There would be no trading value in the stuff given how bland it was, and it would quickly cause recipients to seek out things to spice it up and thereby encouraging job searching and other beneficial behaviors. Given how humans used to trade and kill one another for spices in the not too distant past, the motivation is intrinsic and powerful and should be used to leverage the poor to make better decisions.
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