"The prime minister revealed the existence of 50,000 fictitious names" in the military, said a statement from Abadi's office issued after a session of parliament.
A parliament statement said the premier scrapped the 50,000 jobs, equivalent to almost four full army divisions.
"Over the past few weeks, the PM has been cracking down to expose the ghost soldiers and get to the root of the problem," Abadi's spokesman Rafid Jaboori said.
He said that the investigation started with a thorough headcount during the latest salary payment process.
"There are two kinds of 'fadhaiyin'," one experienced officer in the security forces said, using a word which, literally translated, means "space men", and refers to the fictitious soldiers crowding the payroll.
"The first kind: each officer is allowed, for example, five guards. He'll keep two, send three home and pocket their salary or an agreed percentage," he told AFP.
"Then the second and bigger group is at the brigade level. A brigade commander usually has 30, 40 or more soldiers who stay at home or don't exist," the officer said.
The officer explained that, for those reasons, the thousands of soldiers who defected or were killed this year across Iraq were rarely declared as such.
The United States, which occupied the country for eight years, has spent billions of dollars training and equipping Iraq's military.
Yet the army collapsed when fighters from the Islamic State jihadist group launched a sweeping offensive in June.
Since taking office in September, Abadi has sacked or retired several top military commanders, and today's announcement suggests he wants to tackle the graft and patronage that prevailed under his predecessor Nuri al-Maliki.
"This weeding out process will extend beyond the military to all state institutions," he said.
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