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Transcript

Tim Sablik: My guests today are Zhu Wang and Russell Wong. Zhu is the vice president for research in financial and payment systems, and Russell is a senior economist, both in the Research department at the Richmond Fed. Zhu and Russell, welcome back to the show.

Zhu Wang: Thank you.

Russell Wong: Thank you.

Sablik: Today, we're going to be discussing research that you both have done looking at the phase-out of the penny.

As I am sure many of our listeners are aware, last May, the U.S. Treasury announced that it would cease production of new pennies and the last penny was minted on November 12. Pennies remain legal tender, meaning they can still be used for payment. But no new pennies are entering circulation.

Proposals to end the penny have been around for a long time. So, before we get into your research, could you talk a bit about the economic motivations policymakers have for wanting to retire the coin?

Wang: There are several compelling economic arguments driving proposals to retire the penny. First and foremost is the issue of production costs. According to the U.S. Mint's 2024 annual report, producing and distributing a single penny costs 3.69 cents, nearly four times its face value. As a result, the Treasury incurred a seigniorage loss of $85 million that year from minting more than 3 billion new pennies.

Another important consideration is the diminishing role of pennies in the economy. Due to inflation, the penny's purchasing power has declined significantly over time. Meanwhile, an increasing number of consumers have switched to electronic payments, further reducing the need for physical pennies in daily transactions.

There are also concerns about the transaction inefficiency and resource costs. Pennies slow down retail transactions, creating time costs at points of sale. Additionally, financial institutions and businesses incur substantial expenses sorting, transporting, and storing them.

On the other hand, pennies do provide some social benefits, such as enabling pricing accuracy and flexibility. Without the penny, businesses would need to round cash transactions. These considerations have fueled an ongoing debate about whether and when to retire these low-value coins.

Sablik: Last summer, you both wrote an Economic Brief article examining the potential economic effects of the phase-out of the penny. As Zhu just mentioned, without pennies, all cash transactions would need to be rounded to the nearest nickel, which would become the smallest denomination coin available. This could be positive or negative for consumers, depending on whether prices are rounded up or down. Russell, how did you go about determining which way prices are likely to be rounded?

Wong: Yeah, sure. Instead of guessing, we used data called the Diary of Consumer Payment Choice, maintained by the Federal Reserve. It's basically a nationally representative spending diary where people record every purchase they make, including whether they pay with cash.

Then we did something very simple but also very telling. We looked at the last digits of cash transaction totals. If pennies disappear, cash totals have to be rounded to the nearest nickel. It means some totals get rounded down — good for a consumer. But some other [totals] may get around up — so bad for the consumer in this case. If those last digits were evenly spread from zero to nine, then the gains and the losses will equally cancel out each other. But actually they are not.

What we saw is that cash totals are more likely to end in digits like 3, 4, 8, and 9, which means rounding up, rather than digits like 1,2, 6, or 7, the one that is rounding down. Once we saw that, then the rate is just calculation. So, we applied the standard rounding rule to each transaction [and] calculated the implied gain or losses aggregated across all consumers, and then scaled up to the national level.

Sablik: How does your approach differ from past studies on the impact of penny rounding?

Wang: Past studies for both the U.S. and Canada rely on simulated transaction values based on price information from individual retailers and assumptions on purchasing bundles and sales taxes, leading to mixed conclusions about whether rounding benefits or harms consumers. In contrast, our analysis uses data from the 2023 Diary of Consumer Payment Choice. Participants were randomly assigned a three-day period during which they recorded every transaction they made.

Sablik: So, what did you conclude from your analysis? How will removing the penny impact consumers?

Wong: The short answer is, removing [the] penny will matter, but [only] a little. When we run the numbers using the real transaction data, what we find is that rounding cash transactions to the nearest nickel is not neutral. Because cash totals are slightly more likely to end in digits that round up rather than round down, consumers, in the aggregate, end up paying a bit more.

But it's important to keep the magnitude in perspective. We are not talking about a hidden tax that people will pay every time they check out at the grocery store. The average effect per transaction is still tiny, just a few cents. Even when you add everything up across the entire country, the total cost to consumers is on the order of $6 million per year. In a $30 trillion economy, it is not an economically significant number.

But there are two big caveats. First, it's only affecting the cash user. If you pay with a card, your transaction doesn't change at all. And, cash use keeps declining over time — especially for larger purchases — so the overall impact naturally shrinks over time.

Second, while the effect is small, it's concentrated. Cash users tend to be older, lower income, and less likely to have consistent access to digital payment methods. These are the households that rely more heavily on cash for day-to-day purchases — small transactions at convenience stores, local services — exactly the kind of transactions where rounding comes into play.

Sablik: Are there other factors that might potentially result in the cost being higher or lower than what you calculated?

Wang: We find that [the] annual rounding tax from eliminating the penny is relatively modest compared to the Treasury's losses from producing it.

It's important to note that U.S. pennies will remain legal tender. Consumers can continue using them in transactions, though their availability will gradually decline as existing coins fall out of circulation. In response, businesses may be rounding cash transactions to the nearest five cents, which is common in countries that have phased out low-denomination coins. Consequently, the rounding tax we estimate will be realized gradually.

Meanwhile, electronic payments such as credit and debit card transactions will remain unaffected and continue to be processed as exact amounts. As electronic payments become more widespread, both the share of cash transactions and the need for rounding are likely to continue to decline.

Sablik: Another thing you examine in your research is the potential effects of the nickel being phased out. Why might the five-cent coin also face retirement?

Wong: The nickel costs more to make than its worth and its role in everyday payment is shrinking as cash use declines. Once the penny is gone, people naturally ask whether it still makes sense to keep producing a coin that also generates a loss for the government and is also used less and less.

Sablik: What would be the rounding cost from retiring the nickel?

Wang: Removing the nickel would significantly raise the rounding burden on consumers. Using the same Diary of Consumer Payment Choice dataset, we estimate the impact of eliminating both pennies and nickels. In this scenario, merchants would round up transactions ending in five or more cents to the nearest dime and round down the rest. Our calculations show that it would cost consumers approximately $56 million per year, more than nine times the cost of phasing out the penny alone.

Sablik: Are there any other questions related to this topic that you hope to study in future research?

Wong: I think two big questions we may [investigate]. One will be, how would merchants adjust their pricing strategy? Another will be, how would consumers adjust their payment choices?

Sablik: Definitely both interesting things to watch.

Zhu and Russell, thanks so much for joining me today to talk about your research on the penny.