Study By Quebec Group Calls For Abolition Of "Penny"

By Bret Evans

Canada's much-maligned 1-cent coin is once again being threatened with extinction in the name of economy.

The most recent debate started on Feb. 15, when Desjardins Group, a Quebec-based financial institution, announced the results of a survey on the attitude of Canadians to the humble 1-cent coin. The survey, which uses colloquial terms such as "pennies," claims the coin is only used by about one-third of Canadians.

"Compared to other coins, Canadians seem to find the penny to be the less useful of items," the announcement said.

"Overall, it seems that the lower a coin's value, the less often it is used for purchases. For example, while 66 per cent of Canadians use $1 and $2 coins, that figure drops to 58 per cent for quarters, 50 per cent for dimes and nickels, and only 37 per cent for pennies."

Other tidbits imply that the coin's popularity is linked to age.

While 55 per cent of respondents over 65 use pennies to make purchases, only 13.6 per cent of people between the ages of 18 and 25 use the coins.

Desjardins said the survey supports a recommendation by the firm's economists to withdraw the 1-cent coin, and eventually the 5-cent piece.

Francois Dupuis, vice-president and chief economist at Desjardins' Economic Studies Department, said withdrawing the coin would not cause inflation because prices would be rounded up or down.

"Cash transaction amounts would be rounded symmetrically to the nearest five cents," he said. "For example, transactions where the final price would be $9.98, $9.99, $10.01 or $10.02 would go for $10. Those of $10.03, $10.04 or even $10.06 would go for $10.05."

The 12-page report, entitled "Should we stop using the penny?", goes to great lengths to determine every cost associated with the coin, and even looks at the downside of such a move.

"The 1-cent coin has so little purchasing power that Canadians increasingly refuse it as change for their retail purchases," the report said. "Given its limited usefulness, the federal government should seriously consider stopping the issuance of the penny and removing it from circulation."

The survey points out that New Zealand and Australia have already eliminated 1-cent and 2-cent coins, without any inflation or problems.

"In hindsight, their decision was very good. New Zealand even stopped issuing the 5-cent coins last year."

The report said that, in terms of lost purchasing power, the 1-cent coin should have died a long time ago.

"If the federal government had chose to discontinue or withdraw a coin so that the purchasing power of the second-smallest coin was not below the purchasing power of the 1-cent coin in 1908, the 1-cent coins should have been removed from circulation in the mid-1970s and the 5-cent coins 10 years later. Everything leads us to believe that eliminating the 1-cent coin in Canada would allow us to move in the right direction," the report states.

One interesting portion of the report is the conclusion that it costs at least $130 million a year to keep the coin in circulation.

While accepting that the actual cost of producing a 1-cent coin is less than face value, the survey looked at additional costs relating to storing the coins, transporting them, and even the time involved in handling them.

The study estimated the cost of producing and transporting the cent at 1.5 cents per coin, significantly above face value.

Desjardins' estimate includes factors such as storage costs, depreciation of infrastructure and equipment, and estimated lower expenses if the coin were not to be made.

"We must not forget that the 1-cent coin represents 60 per cent of the production of Canadian coins in circulation," it admonishes.

A similar study by the Economics Department of Wilfrid Laurier University in 2003, estimated a cost of 3.95 cents per coin.

Other costs are set at $20 million for financial institutions to own, transport, and record transactions.

The survey estimated that Canadian financial institutions handle about nine billion cents a year, and they don't earn interest while sitting in bank vaults.

Some $60 million a year in costs are attributed to retailers, again for the cost of storing, transporting, tracking and even time spent at cash registers counting out coins from customers handing them out in change. The report adds that this cost is passed on to consumers as part of the cost of goods and services.

The report made some interesting estimates to come up with a cost for consumers.

While admitting it was a difficult estimate, the report said consumers have to bear the cost of looking for and counting cents during cash transactions.

"Every person spends an average of two seconds a day on these tasks. Adding this time and assigning a value of $5 per hour produces a total of almost $30 million."

The report also put costs to consumers of $8 million due to lost interest that would have been paid if the coins were deposited, and put a value of $32 million on rolling cents and depositing them (one-fifth of the population spends one hour per year on this).

The report declined to include time lost standing in line waiting for other people to search for 1-cent coins to pay for a purchase. After reaching a total of about $70 million for these costs, the authors chose to be conservative and assign a value of $30 million.

However, the 1-cent coin does have an upside.

The report said its use benefits the RCM, the mining industry, armoured car services who transport the coin, and businesses that produce coin rolls and boxes. It also admits the coin's role in charitable fundraising.

The report concluded that companies profiting from the coins would have to replace lost sales.

"The RCM, for instance, could increase its order book by expanding into international markets, where it recently began to secure contracts."

While the report correctly points out that the RCM is in a conflict of interest when advising the government on removing the 1-cent coin from circulation, it fails to recognize the Mint has been executing foreign contracts for many years or that the number of such contracts is based on a competitive bid process, not available capacity.

As for fundraising, the report predicts that if the 1-cent coin were eliminated the 5-cent coin would take its place in gifts and contributions.

"Consumers would benefit from the elimination of these costs while private sector businesses would, in terms of margin, neither realize gains nor suffer losses in the long term.

"Are we ready to bear an additional cost of over $100 million per year on the pretext that we must artificially support these companies (who benefit from the coin) and the RCM and that the 1-cent coins are useful for making gifts and donations?"

The poll, carried out in 2006, surveyed 658 people. Desjardins claims it has an accuracy of plus or minus four per cent, nine times out of 10.

Finally, the report outlines a plan of action to kill off the coin.

"The first step to take in order for the government to decide to remove the penny from circulation is to convince the Minister of Finance on the merits of such a course of action," the report said.

As for the 5-cent coin, the report said "it is important to proceed in stages, as New Zealand did.

"However, if discontinuing the 1-cent coin is successful, and there is every reason to believe it will be, and the experience reassures the public, the federal government should consider, a few years later, the relevance of removing the 5-cent coin. In 2010, the purchasing power of this coin will be approximately one-quarter of the value of the 1-cent piece in 1908."

Christine Aquino, RCM spokesperson, told CCN that the actual decision on the 1-cent coin would be made by the Minister of Finance, not the Mint.

While the RCM will not disclose the exact cost of producing a cent, because it could reveal critical information to competitors, did say that the cost to the government of Canada is below face value.

"The material cost is 0.8 cents per coin," she said. "It does generate seigniorage."

A Department of Finance official told Canadian Coin News that Canadians still want the coin.

"The Department of Finance and the Royal Canadian Mint periodically review the status of the penny, as well as other denominations," she said.

"There still remains a strong demand for the penny as means of payment."

In any case, it seems the humble cent has friends in high places.

When asked for his opinion on the 1-cent coin, Prime Minister Stephen Harper said he'd miss the coin.

"I'm kind of a coin collector from way back so I'd hate to lose the historic continuity of the penny."

http://www.canadiancoinnews.com/inthisissue.html