A panel of the Independent Tribunal Service in Manchester ruled that he was entitled only to the lowest rate of support, pounds 13 care allowance, and not pounds 132-a-week disability living allowance.
The former Liverpool defender, who was known as the iron man of Anfield in the Seventies, has suffered from osteo and rheumatoid arthritis for 20 years.
But he was persuaded to take the penalty kick for charity before the 1996 cup final at Wembley where, he claimed, he was reported by a Benefits Agency worker supporting Liverpool's rivals, Everton.
Mr Smith, 53, said he intended to launch a private prosecution against the worker who named him and would appeal against the panel's decision.
"I'm going to fight this all the way. I'm going to take it further. It's disgraceful. Evidently they don't believe what I say."
Mr Smith claimed that the benefits office worker had bragged in the office about his success in getting the disability stopped.
But the footballer said that anyone who knew him knew that he found it very difficult to walk.
Mr Smith, of Blundellsands, Merseyside, has had two new knee joints, a new elbow and a hip replacement since his days as Liverpool captain. He claimed he could only limp out to take part in the charity kickabout after taking painkillers.
Earlier this year, Mr Smith said: "On the day of the shootout, I was drugged up with painkillers. I was helped on the pitch and the ball was put in front of me."
He criticised a Department of Social Security doctor appointed to examine his case, claiming she was with him for only three-quarters of an hour, adding: "Because I go on holiday to America, because I took a penalty at Wembley, and because I do some after-dinner speaking, that makes me able-bodied. I'm not going to lie down and be trodden on. I think it adds insult to injury when I have never been in trouble in my life. People who know me know I'm up-front." It was the principle, not the money, that was motivating him, he said.
The three-man panel, chaired by Peter Ball, decided unanimously that Mr Smith was not entitled to an award of the mobility component of disability- living allowance.
A statement said that he was entitled to the lowest rate of the care component, pounds 13.15 a week, backdated from 13 September 1996.
Mr Smith's wife, Sue, said the decision was "totally disgusting".
"They could have come to stay with us for a week and seen what I did for him but they still probably wouldn't have believed us," she said.
Mr Smith attended the hearing in a head brace and in a wheelchair following a road accident near Skelmersdale last month. He had to be cut free from the wreckage and suffered three fractures to his spine and four broken ribs.Reuse content