"The best hope of a safe haven for these children is to prevent alcohol and drug abuse by their parents," read the report released Monday.
"We spend more on cosmetic surgery, hairpieces and make-up for men than we do on child-welfare services of substance-abusing parents. In this nation we take better care of condors than of children of substance abusing parents," it added.
The number of abused or neglected children has more than doubled, from 1.4 million in 1986 to more than three million in 1997, according to the study, headed by Joseph Califano, a former secretary of Health, Education and Welfare who now heads the Center on Addiction and Substance Abuse at Columbia University.
"The number of abused children in the United States and neglected children is growing eight times faster than the children's population," Califano told CBS News.
Califano says that seven out of every ten abused children are abused because of parental alcohol and drug abuse.
Most experts on drug and alcohol addiction agree it is a physical illness that must be treated medically, not a moral shortcoming or crime.
But while welfare agencies have assigned more time to be spent investigating neglect and abuse, they were only able to investigate a third of all cases in 1997. And the number of families getting in-home services has dropped 58 percent, from 1.2 million in 1977 to 500,000 in 1994.
"No system is more out of sync with the job it's supposed to do in America than the child welfare system," Califano says.
Califano's team said substance abuse by parents cost the country $20 billion a year -- half in direct welfare costs and half in lost productivity, health care, court and social services costs.
A survey of more than 900 child welfare professionals found that 80 percent say substance abuse worsens most cases of maltreatment of children and 90 percent say alcohol, alone or with prescription drugs, is the main drug of abuse.
Taking children away from their parents does not work, either, Califano said, because only one in four children available for adoption get adopted.
"We think that every child has a right to have parents get treatment and get a fair shot, but that every child has a right for its developmental needs to take precedence over the parents' drug and alcohol problem," Califano says. "That's a very important difference."
Children of abusive parents often grow up to be alienated, aggressive and even violent -- costing society even more, Califano said.
He says that more federal funds are needed to help tackle the problem.
"It's imperative," Califano said. "You know, the costs of this are some $20 billion in child welfare systems costs and related health car and law enforcement costs. If we invest now in these kids when they are young, we will avoid a lot of problems in the future."