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The report by the European Committee of Social Rights concluded that the UK failed to comply with its charter obligations because of the rates paid in incapacity benefit, jobseeker's allowance and the state pension.
But Mr Duncan Smith rejected the call for welfare spending to increase and insisted that the system provided a "valuable and fair safety net".
The Work and Pensions Secretary said: "This Government has made great strides in fixing the bloated and broken welfare system we inherited from Labour - so that spending is brought under control.
"It's lunacy for the Council of Europe to suggest welfare payments need to increase when we paid out £204 billion in benefits and pensions last year alone.
"Whether for short term needs or longer term support, millions of people find that the welfare system provides a valuable and fair safety net when they need it most. And thanks to the triple lock, pensioners are now benefiting from a state pension that represents the highest share of earnings in over 20 years. This is meaningful support helping people every single day."
The report said the levels of the benefit and pension payments fell below 40% of an average income benchmark and the UK had failed to comply with the European Social Charter.
It said: "The Committee holds that even if the minimum levels of short term and long term incapacity benefits, state pension and job seeker's allowance may satisfy the requirements of the European Code of Social Security, they are manifestly inadequate ... as they fall below 40% of the Eurostat median equivalised income."
The report continued: "The Committee concludes that the situation in United Kingdom is not in conformity with Article 12.1 of the charter on the ground that: the minimum levels of short-term and long-term incapacity benefit is manifestly inadequate; the minimum level of state pension is manifestly inadequate; the minimum level of job seeker's allowance is manifestly inadequate."