MW Why ditching the penny may not cost Americans much

Andrew Keshner

Rounding prices to the nearest nickel would not have 'any significant inflationary consequences,' a 2023 study found

Not having a penny to your name doesn't have the sting it once did.

At the Trump administration's so-called Department of Government Efficiency, Elon Musk has revived the great penny debate, a long-running call to discontinue the one-cent coin. And according to some experts, if pennies were taken out of circulation, it wouldn't make much difference to the financial lives of many Americans.

The latest: Trump says he has ordered Treasury to stop making new pennies, citing costs

Prices have climbed so much that the absence of a one-cent coin wouldn't crimp spending power, the economists say.

The DOGE argument hinges on the amount it costs to produce and circulate the penny, which is more than three times the coin's face value. A penny's total unit cost last year was $0.0369, according to a U.S. Mint report.

Also read: Elon Musk wants to kill the penny. The little coin has won this battle before.

Canada discontinued its penny in 2013 and a handful of European countries now have rounding rules to avoid using the euro cent.

But what would losing the penny mean for the American consumer, who has been burned by inflation in recent years and is keenly aware of costs?

"The bottom line, as I see it, it basically isn't going to have any impact," said Wake Forest University economist Robert Whaples, who studied convenience-store data and sales taxes and determined that it would be a wash for consumers once some prices get rounded up and others get rounded down.

Rounding prices to the nearest nickel would not have "any significant inflationary consequences," according to a 2023 study from Oz Shy, a senior policy adviser and economist at the Federal Reserve Bank of Atlanta. And eliminating the penny would decrease the hassle of exchanging cash for customers and businesses.

It is only a matter of time before the penny's demise, the study said.

For years, the Atlanta Fed has looked at the changing ways people pay for goods and services. The data show people are writing fewer paper checks. And while debit and credit cards account for the most transactions, people are still carrying cash. In fact, using cash to pay for things appears to be on the rise.

Nine in 10 people in 2023 said they used cash for transactions in the previous month, up from over 80% in 2022 and 2021. The same reports also showed a climb in the adoption of payment apps, with 72% of survey respondents in 2023 saying they had used a service like PayPal (PYPL), Zelle, Venmo or Cash App $(XYZ)$. That's up from two-thirds in 2022. The reports did not look at how often people used coins.

Other experts, however, caution that there will be a price for ditching the penny without doing a careful analysis first, and that it may end up costing people who can least afford a rounded-up price.

Two decades ago, Raymond Lombra, a now-retired economist at Penn State University, warned of a "rounding tax" that could amount to at least $600 million a year if merchants were to routinely add a couple extra cents to prices to reach the next five-cent level. His 2001 study gamed out what would happen if the U.S. ditched its least valuable coin.

He's not sure how big the total "rounding tax" would be today, given price changes and Americans' shifting payment methods. "But it's not zero," he told MarketWatch.

And that informal tax would continue to have a greater effect on lower-income households, which are less able to absorb the cumulative effect of a couple extra pennies here and there.

Rounding errors?

In a potentially penniless economy, Lombra said, there's a chance businesses "will price in a way that leads to net rounding up. I have no doubt about it."

And his concerns about rounding effects also apply to coins like the nickel, he said. U.S. Mint data show that the cost to produce a nickel is more than double its five-cent face value.

But Whaples doubts consumers would pay more overall in a penniless everyday economy.

In a 2007 study, Whaples looked at convenience-store data. The number value of the final cent on a person's bill was random, factoring in the sales tax on their particular shopping list. There was just as great a chance that a total would be rounded down as rounded up, Whaples told MarketWatch. In a world without the penny, customers would essentially end up in the same financial place they are today, with equal amounts of rounding up and rounding down to the nearest five-cent increment, he said.

And without the physical penny to worry about, cash transactions might be slightly smoother and quicker, he said. "Using cash tends to take a little more time," he noted, and with coins, "you've got to fish them out of your pocket."

There could even be more of a downside to using coins than mere annoyance. In one possible side effect of keeping the penny in circulation, consumers could experience what's known as the "pain of holding." This effect induces more spending simply to get rid of low-value financial pieces, according to a 2023 study in the Journal of Consumer Psychology.

The research, which included a field study in rural India, focused on how people use coins and bills of the same value. The results "suggest that the pain of holding contributes to under-saving, which may be especially problematic among vulnerable populations who rely on cash," according to researchers at Deakin University in Australia, York University Schulich School of Business in Ontario, and Vrije Universiteit Amsterdam in the Netherlands.

Most people have already stopped using physical pennies, so the debate over the coin might be beside the point when it comes to financial-wellness concerns, said Adam Rust, director of financial services at the Consumer Federation of America. What's important is having a bank account, he noted.

Around 4% of U.S. households didn't have a checking or savings account in 2023, according to the Federal Deposit Insurance Corp., with the 4.2% "unbanked" rate slightly lower than the 4.5% rate in 2021.

Meanwhile, it costs banks money to keep cash - and coins - on hand at branches, said Zachary Wasserman, chief financial officer and senior executive vice president at Huntington National Bank $(HBAN)$.

For Huntington Bank at least, those expenses are declining on a relative basis as more transactions are conducted over the internet or through apps, he noted. "As electronic transactions grow, the role of cash is changing," Wasserman said.

Of course, the bank has physical money on hand for customers who want it. "People come into our branches to get cash, and the reality is, if customers want coins, we're happy to provide them," he said.

It's "somewhat logical" that talk has revived about the penny's elimination, because "most people don't transact in pennies," he noted.

"One cent - is that a relevant unit at this point?" Wasserman said.

Steven Gelsi contributed.

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-Andrew Keshner

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February 09, 2025 21:56 ET (02:56 GMT)

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