Outraged pensioner groups say comments made by a former senior Reserve Bank official have cast "criminal suspicion" over 2 million Australians.
Former senior Reserve Bank official Peter Mair said elderly Australians were committing welfare fraud on a massive scale and are behind the extraordinarily high number of $100 notes in circulation.
National Seniors Australia chief executive Michael O'Neill said Mr Mair's comments were "unfounded and offensive".
"Undoubtedly some older Australians may chose to rely on cash - and have a preference for cash because they are uncomfortable with electronic banking and like the convenience issue of having cash - that is entirely different from this nonsense of suggesting pensioners are rorting the system."
Yesterday, BusinessDay revealed there are now 10 $100 notes in circulation for each Australian, far more than the more commonly seen $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 a letter to the Reserve Bank governor, Glenn Stevens, dated July 4, Mr Mair laid the blame squarely on elderly people wanting to get the pension and hiding their income in cash to ensure they qualified for the means-tested benefit.
"The bank is basically facilitating a tax avoidance scheme by issuing high denomination notes," he told BusinessDay. "They are not needed for day-to-day transaction purposes, or even as reasonable stores of value."
Mr O'Neill said he had contacted the Reserve Bank this morning to find out its position on Mr Mair's comments.
"Given it has been raised by their former official and provided to the governor, and then leaked apparently by someone, we are quite concerned about where the Reserve sits on this."
He said government agencies that administer pensions had systems to "deal with these kinds of issues" and he had seen no evidence of rorting.
"It is highly offensive to the millions of Australians who are currently on pensions. We have had a lot of responses from people this morning and they are insulted by the suggestion."
Australian Pensioners and Superannuants Federation policy officer Sharmaine Crowe said the former Reserve bank official should forward any evidence of wide-scale fraud to authorities before making offensive comments.
"Otherwise he had effectively cast criminal suspicion over 2 million Australians," she said.
"If you are someone on the pension and you are effectively being accused of rorting the system you would find that offensive."
Ms Crowe said she had been working for the Australian Pensioners and Superannuants Federation since 2008 and had never heard of elderly people stockpiling notes to ensure they qualified for the means-tested benefit.
"It's not something I have seen. Anyone could be doing that to avoid paying their tax."
Finance Minister Penny Wong has warned elderly pensioners to properly declare their incomes. Senator Wong said today she had "not been looking looking under pensioners' beds lately".
"But I would say we have a system of means testing for access to the pension and people are required to declare their assets and their income in order to access them," she told reporters in Canberra.
Fairfax websites were inundated with more than 320 comments about Mr Mair's comments.
Many readers said the former reserve bank official had unfairly blamed pensioners for the extraordinarily high number of high number of $100 notes in circulation.
"It is easier to blame pensioners who are under-represented in society than to take on the many businesses - small to large - which continue to deal in cash in spite of the GST," one reader said. "One also continues to hear of small property investors, not to mention large developers, who connive with tradespeople dealing mainly in cash. As a result, one wonders what the ATO is really doing to catch such tax evaders."
Mr Mair's best guess is the average pensioner couple could hold up to $50,000 in undeclared $50 and $100 notes to get access to the pension.
Mr Mair said that in 1996 when the green plastic $100 note replaced the grey paper note, the Martin Place headquarters of the Reserve received regular visits from retirees wanting to withdraw large quantities of the new notes. He said the commercial banks had sent them to the Reserve because they did not have enough $100 notes on hand.
Mr Mair said the return for an Australian close to getting the pension who held $10,000 in cash, rather than declaring it, was "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," he said.
Mr Mair used comparisons of the holdings of large-denomination currency in Australia and New Zealand to back his argument. "In broad terms the average value of notes held by New Zealanders is about one third of the $2000 held by Australians - almost all of which by value is in the $50 and $100 denominations," he wrote in his letter.
"An obvious explanation for the difference is means test-free age pensions in New Zealand."
His letter to the governor proposes phasing out the $100 and $50 denominations.
"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."
The letter acknowledges the proposal would be contentious and says it should not be done "in any way precipitously", but as payments become 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.''
With Peter Martin