In a scathing draft report released on Friday, the commission found Australia's veterans' support system was out of date, poorly administered and in need of an overhaul.

It recommended the Department of Veterans Affairs be folded into a single Ministry for Defence Personnel and Veterans, to be overseen by an independent statutory agency.

Mr Morrison was lukewarm on the idea, saying the department did an important job.

"The Productivity Commission will make recommendations from time to time but what is most important to me is that veterans get the support, the benefits, and the respect that they deserve," he told reporters on Friday in Queensland.

"Any decisions taken by our government will have that as its top priority."

The prime minister said his government had been working hard to improve outcomes for veterans.

"We've got the number of days it takes for veterans' claims to be dealt with significantly reduced by about five-fold over the last few years, because we're investing in the systems at Veterans Affairs," Mr Morrison said.

"We want to see our veterans respected and we want to ensure that the benefits that are there to support them when they come back home after they've finished their service can assist them to adjust to civilian life."

Veterans Affairs Minister Darren Chester said his department was already undertaking the biggest transformation in its history.

"It's very difficult to see how you could ever develop an absolutely perfect system, but I can tell you now, we're working very hard to try and achieve that," Mr Chester told reporters in Canberra.

Labor deputy leader Tanya Plibersek said her party would examine the report.

"But I would not support anything that diminished our ability to care for our veterans properly," she said.

The commission's draft report, A Better Way To Support Veterans, found the compensation and rehabilitation system was generous but ineffective.

"It is an outdated, legal and administrative maze which adds to the stress of veterans and is not working in the interest of veterans, their families or the Australian community," Commissioner Robert Fitzgerald said.

The Veteran Mental Health Strategy needs to be urgently updated, especially in the areas of suicide prevention and access to support for veterans, the report said.

The focus needs to shift to the lifetime wellbeing of veterans, with more attention paid to prevention, rehabilitation and transition support.

In 2017-18, the Department of Veterans' Affairs spent $13.2 billion to support 166,000 veterans and 117,000 dependants - about $47,000 per client.

"Veterans should be getting far better outcomes from the $13.2 billion the Australian community is spending every year to improve veterans' lives," Commissioner Richard Spencer said.

Defence should pay an annual premium to help fund future claims and the current system should be simplified.

The commission is holding public hearings in early 2019.

Australian Associated Press