The Morrison government has been told Australia’s $13 billion-a-year system for supporting military veterans is broken and should face overhaul, including abolition of the mammoth Department of Veterans' Affairs.

Calling for "bold" reform to avoid further failure, a new report by the Productivity Commission has found the veterans affairs system should operate more like a modern worker's compensation scheme, with Defence taking more responsibility for ex-service men and women's lifetime care, including better preparing them for post-military life.

Commissioner Robert Fitzgerald said there had been a litany of reviews in recent years but none had produced enough change to make the system fit to meet veterans’ needs.

"The time for tinkering is over, and bold reform is needed," Mr Fitzgerald said. “It’s not that there hasn’t been progress, it’s just not sufficient to get us where we need to be.

"The commission is absolutely clear that unless there are bold reforms … it will not be a system that is able to meet the needs of future veterans."