A former Reserve Bank official says the extraordinarily high number of $100 notes in circulation is the result of massive welfare fraud in which undeserving Australians get access to the pension.
Peter Mair has written to Reserve Bank governor Glenn Stevens outlining his concerns.
There are now 10 green $100 notes in circulation for each Australian, more than the seven more-commonly seen orange $20 notes.
One popular explanation is that they are used for illegal transactions as part of the cash economy, something Mr Mair rejects as a ''furphy''.
In his letter to the governor dated July 4, Mr Mair compares the per-capita holdings of currency in Australia and New Zealand. ''In broad terms the average value of notes held by New Zealanders is about one third of the $A2000 held by Australians - almost all of which by value is in the $50 and $100 denominations,'' the letter says. ''An obvious explanation for the difference is means-test free age pensions in New Zealand.''
Mr Mair says the return for an Australian close to getting the pension who holds $10,000 in cash rather than declaring it is ''enormous''. ''If putting it under the bed or in a cupboard means you qualify for the pensioner card you get discounted council rates, discounted car registration, discounted phone rental - in percentage terms the return is enormous.''
Mr Mair is a former senior Reserve Bank manager responsible for the payments system. He assisted both the Campbell and Wallis inquiries. He says it is best to think of $100 notes stored undeclared as interest-bearing bonds. The ''interest'' is the annual return to the holder in pension payments and concessions. It is paid by the Treasury rather than the Reserve Bank which is conflicted because it makes a profit issuing the notes.
''The Bank is basically facilitating a tax avoidance scheme by issuing high denomination notes,'' he told Fairfax. ''They are not needed for day-to-day transaction purposes, or even as reasonable stores of value.''
Mr Mair's best guess is the average pensioner couple holds around $50,000 in undeclared $50 and $100 notes in order to access the pension.
He says when the plastic green $100 note replaced the grey paper note in 1996 the Martin Place headquarters of the Reserve Bank in Sydney received regular visits from retirees wanting to switch large quantities over.
He said the commercial banks sent the retirees to the Reserve Bank because they didn't have enough $100 notes on hand.
Mr Mair's letter proposes phasing out the $100 and $50 notes which he says technology has rendered unnecessary.
''Cards and the internet have delivered a body blow to high denomination bank notes, they are redundant,'' he said.
''There is no longer any point in issuing them except to facilitate tax dodging.''
''The authorities would announce that from, say, June 2015 every $100 and $50 note could be redeemed but no new notes would be issued. After June 2017 every note could only be redeemed at an annual discount of 10 per cent. It would mean that after two years each $100 note could only be redeemed for $80, and so on,'' he said.
The letter acknowledges the proposal would be ''contentious'' and it should not be done ''in any way precipitously'' but as retail payments become progressively more electronic it will become inevitable.
''What would remain in circulation are coins and a modestly expanded issue of currency notes in the $10 and $20 denominations: there is every reason to expect that a national currency issue of this character would soon be adequate to meet the reasonable needs of a community ever more exclusively making substantial payments electronically,'' the letter says.
Mr Mair would also strip the Reserve Bank of authority for issuing notes, handing it back to the Treasury which had it until 1911.