For the past two years Joe McPhillips has spent a lot of time standing at the window, waiting for the postman. "I couldn't leave without knowing if the postman had been. I've stood at the window sometimes four or five hours, just because I felt so insecure. I've heard there are more cuts coming."

Just before Christmas two years ago McPhillips received a letter that declared in angry red block capitals: "Your benefits are being cut." Two days later he took an overdose and would have died if his brother hadn't discovered him in time, and rushed him to hospital.

McPhillips, 59, has serious mental-health problems, which forced him, several years ago, to leave the job as an industrial saw sharpener he had held for 25 years. He depends on a handful of benefit payments – disability living allowance (DLA), employment and support allowance, and housing benefit. News of the looming wholesale benefit changes unsettled him so profoundly that he has since tried three times to take his life.

Suicidal feelings are complicated, but until this uncertainty began, McPhillips had not felt inclined to end his life; he believes that anxiety over changes to his benefits were largely behind his sudden desire to be dead. "I took an overdose. I got that letter from the Department of Work and Pensions and I just couldn't cope with it," he says, at the house he shares with his brother in north London – the home where he has lived all his life, and which he worries he may lose as a result of the new bedroom tax. "It is the benefit reform that's making me a lot worse, and then there's not the services available when I've been made that way. I feel insecure all the time. Constantly. It never goes away. It's a real feeling of dread."

Three years into the government's welfare reform programme, no one who depends on benefits will have been unaffected by the radical changes, and the anxiety felt by McPhillips will resonate with many. Although his reaction has been extreme, he is not alone in having felt pushed to the brink by the changes he is confronting. Studies carried out by mental-health charities have repeatedly found that aspects of the reform process have had a devastating impact on claimants, but it is only now, as full-scale reform is finally implemented, that the cumulative effect on individuals is finally beginning to be felt.

Reform of the welfare system is a core part of the government's agenda, and polling consistently shows it is one of its most popular strategies. When ministers describe what they are trying to do, their rationale sounds simple and reasonable, until you scratch away at what is being said.

Joe McPhillips: 'I feel iunsecure all the time.' Photograph: Sarah Lee for the Guardian

The changes are designed to streamline a complicated system, to simplify the myriad benefits available, to make it easier for people to move from them back into work, and to ensure that work pays more than the benefits. No one disagrees with that as an aim. However reform is also driven by cost-cutting, which is where things become more controversial.

David Cameron describes the welfare system as "bloated" and if you look at a pie chart of government spending, it's hard not to feel amazed by the amount spent by the Department for Work and Pensions (DWP) – £135.7bn when the coalition came to power– more than was being spent on the NHS (£95bn), or on schools (£42bn), as ministers frequently choose to remind us. But this figure – which isn't the relevant one in a debate on trimming the costs of out-of-work benefits – is frequently misused. Ministers have an annoying tendency to lump together the money spent on pensions (£70bn) and the money spent on benefits, to alarm people with the huge overall sum, to bolster the case for cuts – when there is no question of cutting pensions.

While it is true that spending has increased substantially, much of the growth comes from the rising cost of housing benefit (which soars as the property market soars) and spending on people who are working, but earning very low wages – working tax credits, and child tax credits. The amount spent on jobseeker's allowance, for example, the key unemployment benefit, is relatively small – around 3% of the departmental total – but the political debate about escalating costs has been focused, to a distorting degree, on this area of spending.

In a keynote speech on welfare reform, the secretary of state for work and pensions, Iain Duncan Smith, whose vision is driving most of the changes, set out in his politely reasonable tones the fundamental rationale behind welfare reform.

"Under the last government, spending on benefits and tax credits increased by over 60%, rising even before the recession – when growth was booming, jobs were being created, and welfare bills should have been falling," he said. "More money was spent on welfare than ever before – by 2010, costing every household in Britain an extra £3,000 a year in tax."

Work and pensions secretary, Iain Duncan Smith, condemns 'entrenched worklessness and dependency'. Photograph: Andrew Yates/AFP/Getty Images

Naturally we're trained to take government statistics with a pinch of salt, but this figure is deliberately confusing to an exceptional degree. The speech up to this point had been about "entrenched worklessness and dependency" but these startling figures include spending on pensions, and so say less about a group of people "sitting on benefits long-term" than about an ageing population, and the soaring cost of pensions that comes with that.

When the chancellor George Osborne outlines his vision for welfare reform, he sets up an opposition between people who "work hard" and "do the right thing" and people who get rewarded when they "do the wrong thing".

"For too long, we've had a system where people who did the right thing – who get up in the morning and work hard – felt penalised for it, while people who did the wrong thing got rewarded for it," he said, adding that system the coalition inherited was unaffordable: "In 2010 alone, payments to working age families cost £90bn."

What he doesn't explain is that a large proportion of those payments are sucked up by housing benefit and tax credits, paid to people who are getting up in the morning and doing the right thing – people who are working but on low pay.

When David Cameron talks about it, he repeats the mantra about backing "those who work hard and do the right thing". "Today, almost one pound in every three spent by the government goes on welfare," he says, describing the system as one that "trapped people in poverty and encouraged irresponsibility" – again inviting his audience to believe that this money is spent primarily on people who do not do the right thing – whereas, the one-in-three figure (the DWP press office clarifies) encompass spending on pensions too, so has nothing to do with either doing the right thing or being irresponsible.

There is a huge gulf between the picture of irresponsibility painted by the government when it explains the reasons for reform, and the reality, seen by charities that have been under increased pressure over the past three years to help those caught up in the reform.

Gillian Guy, chief executive of Citizens Advice, says she has challenged the government over framing reform with this notion of hard workers versus irresponsible idlers. "The picture that is painted is that all benefits claimants and recipients are those who are idle and not wanting to work, and wanting to play the system. That's not very helpful, particularly to the vast majority of people who are not wanting to claim benefits, seeing this as a safety net that they need to have recourse to, and wanting to get out of it as quickly as possible.

"We've challenged the government over whether they are presenting that kind of picture – the scroungers/strivers issue – and they recognise that it is not helpful and they have said to us they will seek not to do it. It paints a false picture. There is an implication that it is people's own fault when they end up in a situation where they need support, and that's not the experience we have. Actually it could happen to anyone of us."

Antonia McKnight: 'I'm really trying.' Photograph: Graeme Robertson for the Guardian

Antonia McKnight's experience demonstrates the massive disconnect between the picture painted by the government of benefits claimants and the reality experienced by some of those who are seeing their payments cut.

No one could suggest that she is living in luxury or enjoying a lifestyle that could inspire envy in others. The small flat where she lives with her four-year-old daughter has views on to brick walls, the wiring has gone, so there is no light in the bathroom or her bedroom, and the furniture is secondhand and broken. The rent is £500 a week.

Since August, McKnight, 38, has seen her benefits capped at £500 a week, under the coalition's new £26,000 benefit cap – introduced with the aim of bringing "fairness into the benefits system". Since her weekly rent is exactly equal in size to her benefits, she is already in serious financial trouble.

Although she understands the government's desire to make the system fair, she feels that the impact of the policy on her family is very unfair, not least because she did not choose to be housed by Westminster council in such an expensive flat. She is already over £1,000 in arrears because it is impossible to meet the rent and feed and clothe her daughter and pay the bills; she has been told that after 19 years in Westminster, she is likely to be moved to accommodation out of London.

"I didn't choose to live here. I was put here. I've been in temporary accommodation for six years. Because I'm studying in college and not working, I'm bottom of the list for housing," she says.

Designed to ensure that no one on benefits receives more than the national average income, the new benefit cap has, according to chancellor George Osborne, a "very simple principle at its heart: no family that's out of work should receive more in total than the average family gets in work". There was a surge of stories in local and national papers around the announcement – highlighting the extravagance of families with multiple children, demanding better and bigger accommodation. Osborne pointed to (very unrepresentative) cases of families who received £100,000 a year in housing benefit. Although it seems that only five families received that amount, this attention-grabbing figure has shaped the debate.

Polling suggests it is the coalition's most popular welfare policy, with 71% of Labour voters also in favour of it. Labour's new shadow social security secretary, Rachel Reeves, has indicated that it is a policy that her party supports, with some caveats, commenting: "I think it is right that those people who are in work do not feel that those who aren't in work are getting something that they couldn't dream of getting."

Whether McKnight's flat represents a dream is questionable, but it is clearly very expensive. For anyone unfamiliar with the extraordinary, unfaltering rise of the London property market, a rent of £500 a week will seem unthinkable, but soaring rents are the reason that the housing benefit bill has become so huge. Council accommodation would be far cheaper, but there is a huge shortage of it in central London, and McKnight is still waiting.

She has been housed for six years in temporary accommodation, after becoming homeless because of a drug addiction. She attended treatment, has been clean for the past six years, and is currently studying for a diploma in nutrition at a Westminster adult education college. Once she has completed her course, she wants to go back to work.

"I'm really trying. I was awarded student of the year last year," she says. She is concerned that if she is moved out of London she will lose the support of the Narcotics Anonymous group and her church, both of which have supported her through her recovery.

Romin Sutherland, project manager with Z2K, an anti-poverty charity working with low-income households across London, who has been advising McKnight, said: "With rents in London being so extortionately high, we are seeing a lot of small families like Antonia's who are being penalised for no other reason than being unfortunate enough to have become homeless and be placed into expensive temporary accommodation. While the government would like the public to believe that all of the families affected by the Benefit Cap are 'skivers' who expect the state to pay for their lifestyle choices, more often than not the true cause is high cost housing. Most people outside London will be shocked to hear that Antonia's rent is £500 per week, but that isn't Antonia's fault. That is the failure of successive government to regulate and bring rents under control."

It can feel awkward to hold up for inspection individuals who have had difficult experiences as far as the welfare system is reformed, because people's lives are complicated, and do not always elicit instant understanding. But without the voices of those affected, a discussion of welfare reform soon becomes impenetrable. In any case, the point isn't to try to classify them according to the government's framework of people who do the right thing versus people who are irresponsible, but just to say that the benefit cap isn't really curbing the excesses of people wanting to live extravagant lifestyles that others couldn't dream of, but is affecting people who genuinely need the support of the welfare system.

Increasingly, campaigners are asking the government to think about the cumulative impact of all the different elements of welfare reform and of introducing it at a time of recession.

"These reforms are often seen in isolation, but you have to see them in the real world, where the cost of living is going up, energy prices are going through the roof, employment is not that stable, even where there is employment – we're looking at things like zero-hours, temporary employment, where people are really on the cusp of being able to manage," Guy of Citizens' Advice says. "All of these things are happening. There isn't any real clarity about how this is going to impact on people."

Helen Cameron, head of public policy for the Salvation Army, says the combined impact has increased pressure on the charity's services. "We are not only dealing with a recession and its aftermath but the wholesale reform of the welfare system, which is making life very difficult for the people we help. But we're very clear that the answer isn't to stop the reform. The current system is not fit for purpose."

Tony Wilson, policy director for the Centre for Economic and Social Inclusion, an apolitical institution that analyses the labour market, welfare and poverty, says: "No one fully understands the cumulative impact of all of these reforms, and the government has said as much. These cuts are unprecedented. By the end of this parliament the government will have taken out one pound for every seven that would have been spent. The size of the cuts alone is more than the entire police budget, more than we spend on overseas aid. It's clear that central government did not think through the combined impacts of reforms when these decisions were made.

"Most of the cuts have fallen on working families, on low incomes, with children and often in privately rented housing. Also, families with disabled people and those with health conditions are being particularly hard hit. It's not really clear what the rationale for this could be other than simply cutting costs."

Tony Marcola: 'I was doing everything I could.' Photograph: Christopher Thomond for the Guardian

In the past few years, Tony Marcola, 46, has experienced the dual pressures of the downturn and welfare reform. Having worked all his life, he lost his job as a van driver for a fruit-and-vegetable wholesale firm in 2008, when fuel prices went up, and the company's owner decided he could no longer afford to offer a delivery service. Not long after, companies started closing offices in Burnley.

"First the jobcentre was empty and then suddenly it was packed full. People were losing jobs left, right and centre," he says.

He attended courses, learned how to use a computer and write a CV, and continued to apply for jobs but without success. "Burnley was going down a black hole. At the time I was expected to get a job, there were a lot of places shutting down," he says.

As part of the government's drive to reform the system, much harsher conditions have been introduced to ensure that those who are receiving jobseekers' allowance are seeking work. The use of sanctions – periods when benefits are stopped as punishment – has increased dramatically.

In July, Marcola was told that there would be new conditions attached to the benefits he received, and he was told that he had to prove that he was applying for 20 jobs a week. "I said: 'Well, I'll do my best.' It jumped from four jobs a week to 20, it's a quite a leap," he says. He began by meeting that target, even if it meant applying for jobs that he was not qualified for, and stood little chance of being selected for, but one week in July he only managed to apply for 15 positions. He was struggling financially anyway, with increased gas and electricity costs, and a new £20 bedroom tax charge for the spare room in the house where he'd brought up a child, who was no longer living at home. After bills, he was left with about £13 a week for food. Applying for jobs involved finding places with free internet, because he couldn't afford to have internet access, let alone a computer, at home.

"I tried to explain that I could not find any more jobs to apply for," he says. Later that week he found that his benefits had not been paid, and when he asked why he was told he had been sanctioned for four weeks.

"It was so shocking, when I was doing everything I could. I was panicking. I didn't know what being sanctioned meant. I was so miserable," he says. He appealed against the decision with the assistance of Citizens Advice. "The Citizens Advice people could see I was on the verge of a breakdown." He worried that with no money to pay for the electricity, the frozen supplies in the freezer would ruin, and he would have nothing to eat.

David Cameron says the welfare system is 'bloated'. Photograph: Tal Cohen/EPA

DWP figures show that there was a 24% increase in the number of sanctions from July 2012 to July 2013. Although the principle of getting people to show that they are seriously looking for work in order to qualify for benefits payments is one that Citizens Advice supports, they are concerned that very harsh sanctions are being applied; the charity has seen a 46% increase in problems related to sanctions in the past year, and Guy says problems such as those experienced by Marcola are "systemic". "The system is all stick and no carrot."

Although the government has launched wholesale reform, many of the changes are yet to be implemented, and alongside the unease at the discomfort caused by measures already in place is the whole separate issue of whether key parts of the reform programme – the all-new benefits system, Universal Credit, for example – are actually going to work. Ministers have already written off £40m on failed IT programmes, and that figure is expected to rise. Despite insisting for months that the project was on track, Duncan Smith admitted earlier this month that the roll-out has been substantially slowed down. Reeve describes the programme as a "complete shambles".

Neither Duncan Smith nor other ministers within the DWP were willing to be interviewed, but Duncan Smith said in an emailed statement: "There is of course much more to do, but we are well on our way to delivering reforms that will ensure a fairer and simpler welfare system."

The question of fairness remains contentious and no group has been harder hit by the experience of ongoing welfare reform than people with disabilities. Steve Winyard, head of policy with the RNIB, who also speaks for the Disability Benefits Consortium, an umbrella group of disability charities, who work to challenge cuts to disability benefits, says: "To suggest some families have been plunged into crisis is no overstatement. There have been suicides as a direct result of the reduced support and poisonous atmosphere generated by some sections of the press. Many disabled people express feelings of shame and 'being a burden' as a result of the way some changes have been pitched by government. Sadly, too little in the way of empathy or understanding has been expressed by ministers.

"The agenda is driven by a demand for savings, without potential new costs being accounted for – or any recognition of the contribution things like disability living allowance make in helping prevent avoidable NHS use or keeping disabled people in work … Given the majority of those half a million disabled people who will lose out under DLA cuts are yet to be affected it appears there is worse yet to come for many families."

The retesting of everyone who received the old incapacity benefit was started by the last government but rolled out in full in 2010. The process has been intensely difficult for many people who have gone through the newly tightened assessments, many of whom have unexpectedly found themselves inappropriately judged fit for work, triggering hundreds of thousands of legal challenges.

Royston Shearer: 'At the work capability assessment, they didn't ask about my blindness.' Photograph: Sarah Lee for the Guardian

Royston Shearer, 47, who was born blind, has already been through two work capability assessments – to check his eligibility for employment and support allowance – although his condition is incurable and will not improve. The first time, he was surprised at how much of the assessment seemed to focus on irrelevant details – such as his ability to stretch out his arms.

"They didn't ask much about my blindness. I did think it was weird. The blindness took a back seat really," he says. He was found fit to work, but his GP helped him appeal the decision because he didn't feel he was capable of working. For a while during the appeal process, his payments were stopped. Although he won his appeal, and was ruled unfit for work, earlier this year he was required to go back for another assessment. The doctor who conducted that assessment was surprised that he had been recalled.

"There's no probability of it improving. The doctor said: 'You shouldn't even be here.' He sent me home," he says. Shearer is unclear about whether the decision is now final or if he will need to return for more assessments.

Paul Farmer, chief executive at Mind, says: "Unfortunately we hear from many people who have contemplated and even attempted suicide, in large part due to changes to their benefits. The flawed assessment process, along with the threats and sanctions being imposed on people, who are often already vulnerable due to their mental health and other disabilities, can create further anxiety and in some cases have disastrous consequences.

"The DWP needs to consider the impact that their actions are having on some of the most unwell and impoverished in society; as well as the huge financial implications for the NHS and crisis services."

An online campaign group, the WOW petition, which organises resistance to the "war on welfare", has gathered over 100,000 signatures, calling for an end to the work capability assessment and a cumulative impact assessment of all cuts and changes affecting sick and disabled people.

For Jane Bence, one of the petition's organisers, life for people with disabilities has changed immeasurably with the introduction of reform. "There has been a huge negative impact. People are living in fear of receiving a brown envelope from the DWP. The disabled community are being disproportionately affected and feel under permanent attack," she says. "It has become so apparent that the sick and disabled are bearing the brunt. The message is all about hard-working people – the implication being that if you don't work, you're not part of society. Most people with disabilities want to work. We've become third-class citizens, or something worse than that."

Has this painful process saved money? Not so much. In 2010/11 the government spent £95.4bn, 13% of overall government spending, on benefits and tax credits for people of working age, and children (this is the most useful figure, which exclude pensions). In 2013/14, the government is forecast to devote £92.9bn, or 12.9% of overall spending, to it. But the cuts seen so far are just the start. Osborne has predicted that the welfare cuts will run into "many billions" of pounds.

Shearer describes how the sense of uncertainty dominates his life. "It puts you on edge. You think: 'Is my money going to be stopped again?' It's a constant nagging, a constant worry. Is it going to be tomorrow that I receive another letter? I realise that money has to be saved, but it seems to me that they are just going the wrong way about it. Why are they targeting the people who need it the most?"