Canada’s Cent Elimination Includes Hidden Costs

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by Richard Giedroyc

January 15, 2013 – On the surface Canada’s cost saving measure through which the 1-cent coin is being eliminated appears to make sense, no pun intended. In March 2012 Canada Finance Minister Jim Flaherty told the House of Commons, “It costs taxpayers a penny and a half every time we make one.” Flaherty referred to Canada’s diminutive 2.35-gram weight 1-cent coin as a “nuisance” in budget documents. Flaherty told the House of Commons, “Pennies take up too much space on our dressers at home…They take up far too much time for small businesses trying to grow and create jobs.” With that, the Royal Canadian Mint ceased striking 1-cent coins in April 2012. This, theoretically, was to be a cost saving measure for the mint and for the government, who is the mint’s sole shareholder.

A 2012 Desjardins Group study suggested the discontinuance of the cent could save the private sector $150 million annually. This took counting, storage, and transportation of the coins into consideration.
What about the consumer? It doesn’t appear the government or retail businesses were particularly concerned about them. The March 29, 2012 The Globe and Mail newspaper in Toronto quoted an unnamed government official as saying, “Businesses are expected to round prices in a fair, consistent, and transparent manner.” The Globe and Mail article then editorialized by adding, “It [Canadian government] couldn’t guarantee consumers would be better off but cited a 2005 Bank of Canada study that concluded the inflationary impact of eliminating the penny would be ‘small or non-existent’.” The article then added, “The federal government says it will encourage charities to collect pennies from Canadians and redeem them through banks and the mint as a fundraising venture.”

Did the Canadian government look at the raw figures of the cost of production without calculating any peripheral costs or additional impacts to be incurred? Did they have any reliable estimate on the number of 1-cent coins being held by the public? The Desjardins Group study estimated the public is in possession of several billion cents!
Did the government consider inflationary pressures should merchants consistently round prices up rather than down? Unlike in other countries where the lowest denomination has in recent years been withdrawn due to costs and the low purchasing value of the coin, Canada has not mandated how prices are to be rounded both up and down, but has left this up to the individual merchant.
Debit and credit card transactions can continue to price transactions to the cent, however once again there is nothing mandated that prevents merchants from rounding prices up to the next five cents.
Also to be considered is that, according to the same The Globe and Mail article, “Federal officials said more than 35 billion pennies have been minted in Canada in the past 104 years. This, they noted Thursday, would weigh 94 million kilograms – or as much as 1,500 Leopard 2 tanks.”

Now it appears the other shoe is about to drop – adding to the many shoes that have already dropped. The December 19, 2012 The Globe and Mail published an article that begins, “The demise of Canada’s 1-cent coin next year will cost taxpayers a pretty penny. Finance Minister Jim Flaherty announced the impending withdrawal of the penny in last March’s budget, saying the government would save $11 million a year in production costs. But a new analysis of costs shows that redeeming the mountain of circulating pennies beginning Feb. 4 will cost taxpayers about $7.3 million a year.”
This new Canadian government analysis projects it is going to cost about $38.3 million to redeem an estimated 6 billion coins. This figure includes $53 million anticipated to be paid out in exchange for the coins being redeemed. There is another $27 million in costs anticipated for handling and administrative overhead that will be incurred by the RCM.

The recently defunct 1-cent coin is composed of zinc and copper. The cost of recycling this metal is estimated to cost the government another $42.5 million, according to The Globe and Mail. The newspaper suggests this will leave the government “in the red at just over $38 million.”
There may yet be a bright side to all these statistics. The article continues, “adding the $11 million in annual savings from not minting any more pennies, which ceased production May 4 this year [2012], still gives the government annual savings of almost $4 million over the expected six-year redemption period.”
This six-year redemption period, of course, suggests the government might demonetize the denomination six years from now. The government, however, has not made any such statement. For now the coin remains legal tender.

On December 19 Canada’s Finance Department posted a cost-benefit analysis in addition to a consideration of a non-regulatory measure for cents being redeemed. According to the Finance Department notice, “A non-regulatory alternative option would include refusing to pay for the returned pennies. This option has been rejected because, without a government commitment to cover the redemption costs, Canadians might lose confidence in the value of the penny, and other circulating currency. This could threaten the integrity of the coinage system as the intrinsic value of Canadian currency is based on a high level of confidence in the currency system.”

Canada hasn’t withdrawn a circulating coin denomination since 1914. In the past approximately 40 years at least 17 other countries have withdrawn a low denomination coin for the same reasons Canada is now withdrawing the cent. Since although this may be a first for Canada the situation is not unique. There are lessons to be learned from how other countries have handled the logistics and economics surrounding their situations.