MPs have expressed shock that almost a third of 18-year-olds with special educational needs are not in any form of education, employment or training.
Too many young people are falling through the gaps once they leave school, the Commons Public Accounts Committee says.
Its report finds the system is so complex that some families lose hope.
The government said it was determined to make the system fairer and more transparent.
The report into special education for young people aged 16 to 25 says that although the government provides the funding centrally, it is left to local authorities to decide how it is spent.
In 2009-10 the government spent £640m on special education for this age group, but the report says there is a huge variation between local authorities in funding per student.
This, say the MPs, suggests a postcode lottery is at work.
The MPs also say that three-quarters of local authorities fail to give parents any information about the respective performance of the schools and colleges on offer.
Committee chairwoman Margaret Hodge said: "Parents need to know what support their child is entitled to, how it can be accessed and how well different options would meet their child's needs."
The result is that some parents and young people find the system so hard to navigate that they despair of getting the help they need, say the MPs.
The government is planning to reform the way special needs education is funded.
The report says the government should commit to publishing "robust data" on special education funding and expenditure at local and national level.
It says the Department for Education should identify local authorities with particularly high numbers of young people not in education, work or training.
The system should be made simpler and more accountable, with more information available both to parents and to taxpayers, say the MPs.
The statementing process, in which the requirements of special needs pupils are identified, should be overhauled to become clearer, quicker and more consistent, says the report.
Organisations which lobby for better special needs education welcomed the report.
Children's Minister Sarah Teather said: "All too often disabled young people or those with special educational needs fall through the gaps in services when they reach 16.
"That's why we have proposed the biggest programme of reform in 30 years. This includes a new single education, health and care plan from birth to 25 focused on improving the outcomes for those with the most severe needs.
"This will mean local services all working together to provide targeted support, with young people and their families getting much more information and advice on preparing for further education and work."
Lorraine Peterson, chief executive of special needs information body Nasen, said provision of special needs to this age group needed urgent action.
She said: "We need a strong commitment from government to develop clear pathways for our young adults with special needs to gain the skills to help them make the career choices that others take for granted."
Jane McConnell, chief executive of Ipsea, said families were traumatised by the failings of the current system.
"The current post-16 system is overwhelmingly fragmented.
"Parents and young people are pushed from service to service with no-one taking responsibility for supporting them," said Ms McConnell.
Mark Lever, chief executive of the National Autistic Society, said the figures came as no surprise.
"Young people with autism and other special needs have been failed for far too long. If given the right help and assistance there is no reason why many cannot go on to full-time employment," said Mr Lever.