Pensions minister Jeff Rooker made the admission under pressure from Liberal Democrat MPs.
Problems with the Nirs2 national insurance system has left a backlog of pensions and benefits miscalculations. Rooker admitted that more than 2,000 new pensioners each month were receiving incorrect payments.
"This is a problem the Government has known about for years. It is simply not taking it seriously enough," said a Liberal Democrat spokesman.
Rooker told MPs, "The Benefits Agency will not complete its review of benefit claims affected by the delayed implementation of Nirs2 by the end of this year as had been expected.
"Full completion of the necessary benefits review is dependent on the clearance of work arrears in the Inland Revenue's National Insurance Contributions Office (NICO). Benefits Agency recovery cannot be achieved until after the NICO recovery has been achieved - and this will not be by the end of the year."
Rooker condemned the Nirs2 computer as "rubbish" in a parliamentary debate earlier this month. "Over the years, under-investment in IT and purchase of the cheapest systems have brought us to a sorry state," he said.
Andersen Consulting, which won the Nirs2 contract despite bidding £100m less than its rivals, said, "The Nirs2 system is fully functional, stable and has been operational for some considerable time.
"Our client, the Inland Revenue, this month told the Treasury Select Committee, 'Since March 2000 the Nirs2 system has been stable with all its main functionality in place. Changes to the system in April 2000 to support national insurance contribution restructuring were successfully introduced. The system is currently substantially ahead of target for 1999/2000 in making payments to the pensions industry."
However, Rooker said, "The word stable, when used in relation to information technology systems, does not mean 100% perfect."
NICO employees are working at full capacity and hundreds of temporary staff have been taken on to solve the problem. But a Revenue spokeswoman said, "We can't just go out and hire people - unless we are given more money. Even if we could hire them, we would have to train them up."