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The case for keeping the penny

The Canadian penny is about to become a collector’s item.

They clutter your dresser and cost too much to make. They’re a nuisance and have outlived their purpose.

Finance Minister Jim Flaherty was talking about the Canadian penny and why the Royal Canadian Mint will end its production this fall as part of his austerity budget.

“The penny is a currency without any currency in Canada, and it costs us 1.5 cents to produce a penny,” Flaherty told reporters.

Responses Friday were mixed, with some Canadians saying it would make life easier, while others worried it would become an opening for sneaky price hikes.

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Flaherty said a Canadian senate committee held hearings on the penny last year and not one witness came forward to say it should be spared.

A government statement said New Zealand, Australia, the Netherlands, Norway, Finland, Sweden and others “have made smooth transitions to a penny-free economy.” It said penny production cost $11 million a year, and that the coins, which feature two maple leaves and Queen Elizabeth II in profile, would remain legal tender until they eventually disappeared from circulation.

It said it expected businesses to round out the numbers on price tags where necessary.

This explains the details of rounding out the prices.

The 2012 federal budget states: “The government expects that businesses will apply rounding for cash transactions in a fair and transparent manner.”

The rounding will not be done on single items but on the total bill of sale. If the price ends in a one, two, six, or seven it gets rounded down to 0 or 5; and rounded up if it ends in three, four, eight or nine.

Businesses will not need to adjust their cash registers.

That’s only for cash transactions – if you pay via credit or debit card, you get charged the original, un-rounded amount. Call my cynical, but I have a sneaking suspicion that large retailers will have pricing software that is sophisticated enough to adjust retail prices on various items in a way to tilt the roundoffs in their favor. You’d never notice it, of course, but in the aggregate I bet it would add up to some real money.

Indeed, there’s some empirical evidence for that, which leads to the case for keeping the penny.

A 2001 economic analysis by Penn State’s Raymond Lombra found that a post-penny economy—in which we round to the nearest nickel—would probably hurt the poor disproportionately. In theory, rounding would balance itself out over time—with 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.

Admittedly, that’s just one study from a decade ago, but is there any reason to think it wouldn’t be at least as valid today? For sure, lower income folks disproportionately use cash, so even a relatively small effect, which $600 million in our economy would be, would still be mostly felt by those who could least afford it. I’m one of those people who likes the penny, for strictly sentimental reasons, but this is enough to make me want to defend that position. You’ll need to show me a fix for this problem before I’ll listen to any penny-elimination talk for the US.

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