The Study

One Cent for the 99%: Why Eliminating Pennies Doesn’t Make Sense

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Yesterday the Government of Canada announced it was eliminating the penny from Canada’s coinage system. The provided reasons: Its declining spending power, rising production costs (1.6 cents per penny), and the harsh reality that “some Canadians consider the penny more of a nuisance than a useful coin.” Likewise, other countries have been re-evaluating their lowest-denomination coins, with Australia, Norway, and Switzerland among those that have already stopped circulating them. In the U.S., President Obama asked Congress for permission last month to change the metal composition of pennies and nickels: It currently costs the U.S. Mint 2.4 cents and 11.2 cents to produce each penny and nickel, respectively. Pennies may lead sad, pointless lives, voyaging from one leave-a-penny/take-a-penny tray to another. But would plans to put them out of their misery have regressive effects?

A 2001 economic analysis by Penn State’s Raymond Lombra found that a post-penny economyin which we round to the nearest nickelwould probably hurt the poor disproportionately. In theory, rounding would balance itself out over timewith some transactions rounding up and others rounding down. Lombra’s simulations, however, which were based on the price book of a major retail chain, found that between 60 and 93 percent of transactions would round up, costing consumers nearly $600 million a year. Because the poor tend to use cash more often, they would shoulder most of that burden. Penny for your thoughts…

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