Is It Time to Retire the Penny?

Considering the Case for Change

The newly established Department of Government Efficiency (DOGE) is actively pursuing initiatives aimed at reducing government waste and improving productivity. These efforts have included a range of proposals, some of which have generated discussions, controversies, and lawsuits.

Amid the initiatives receiving attention is the suggestion to eliminate the penny from U.S. currency, a proposal introduced by DOGE in late January. Following this, President Donald Trump directed the Treasury Department to stop minting new pennies. While this idea has not generated the same level of controversy as other initiatives — such as federal workforce reductions or cuts to certain foreign aid programs — it has raised important questions about the future of the penny.

This brief examines the arguments for and against eliminating pennies, considering past reform efforts, international examples, and other relevant factors.

Reasons To Retire the Penny

The strongest argument for eliminating pennies is an economic one. The 2024 U.S. Mint annual report shows that the federal government produced roughly 3.2 billion pennies, with a production cost of 3.7 cents per penny. Overall, it cost $117 million to produce these pennies, including materials, labor, administration, and overhead costs, despite their total value being only $31.7 million. This is referred to as negative seigniorage — i.e., it costs more to make these coins than their face value — and it totaled $85.3 million in 2024. Moreover, between 1900–2022 the purchasing power of a penny decreased more than thirtyfold.

Since pennies made up 54% of all coins minted in 2024, they accounted for the Mint’s biggest financial loss in coin production. Nickels also followed a similar trend — in 2023 producing them resulted in a $92.6 million loss, even higher than the $86 million lost on pennies. The Mint has been losing money on one- and five-cent coins for around two decades.

Interestingly, the agency itself recommended cutting the penny production because of the high cost of minting and circulation. In 2022, a U.S. Mint report identified “a substantial percentage of low denomination coins that were already in active circulation” as one of the significant challenges to facilitating coin circulation. It also acknowledged another reason for lower coin usage: there are fewer commercial channels for recirculating coins — such as toll booths, laundromats, transit systems, parking meters, and casinos — as these traditionally major coin users increasingly turn to electronic or cashless payments.

In addition to the monetary savings from minting fewer pennies, the 2022 report notes other benefits:

• Positive Environmental Impacts — reduced raw materials extraction, lower carbon emission, and less fuel used during transport.
• Societal Savings — reduced handling costs for pennies, benefiting consumers, retailers, financial institutions, and others.

Although the report stops short of recommending the immediate retirement of pennies, it suggests that circulation should be significantly reduced and mentions that, according to a third-party analysis, a reduction in penny production could potentially save the U.S. Mint up to $100 million per year. The report does not provide further details on the specific implications of this proposal.

Reasons To Keep the Penny

There are several key arguments against eliminating pennies, ranked in order of significance:

• Impact on Rounding — Removing pennies could lead to rounding up prices, potentially affecting consumers.
• Effects on the Unbanked and Underbanked — Individuals who rely on cash transactions may be disproportionately impacted.
• Potential for Nickel Elimination — If pennies are discontinued, nickels could become the next target.
• Rise of Central Bank Digital Currencies (CBDCs) — The push toward digital currencies raises concerns about financial accessibility and government control over transactions.

Impact on Rounding

The most commonly cited economic argument against removing pennies is that it would hurt low-income families because retailers will round up prices to the nearest nickel when customers pay cash.

There are few recent U.S.-based studies on rounding, and those that exist show conflicting findings, as illustrated by the two studies below.

Study 1: 2001

A 2001 study by Raymond E. Lombra argued that rounding negatively affects low-income consumers. It found that since over 80% typical retail prices end in nines (e.g., $4.99), the prices would tend to be rounded up, leading to increased costs for shoppers.

The author simulated potential purchasing transactions of different numbers of items and estimated consumer losses ranging from $318 million to $818 million per year, depending on the number of items bought. For example, the calculations showed that 60% of the transactions will be rounded up if a consumer buys three items. If one or two items are purchased, 93% of the transactions result in rounding up.

Study 2: 2007

A later study by Robert Whaples critiqued the earlier approach, identifying two main flaws in the 2001 study.

1. The 2001 study assumed transactions instead of real data, making it difficult to accurately measure the impact of rounding. For example, if a consumer buys four items priced at $2.99 (totaling $11.96), the price would be rounded up. However, if the consumer buys six items (totaling $17.94), the price would be rounded down to $17.90, benefiting the customer. In contrast, the 2007 study used actual grocery store transaction data and found that the rounding effects tend to cancel each other out. Two Canadian studies support this finding, showing that rounding does not significantly affect prices there either.
2. The 2001 study also failed to consider the effect of sales tax. For example, when purchasing a $2.99 item in Houston, a consumer would pay $3.24 after sales tax ($2.99*1.0825). The price would then be rounded down to $3.20, benefiting the consumer. However, Whaples noted that many food items and necessities are not subject to sales tax, meaning that the impact of rounding depends on the number of items purchased. Therefore, whether rounding results in a gain or loss for the consumer is an empirical question.

The earlier study also assumed that consumers conducted 83% of transactions in cash. While that might have been a valid percentage at that time, by 2024 only about 16% of transactions were in cash. This means the effect of rounding effects would now be significantly reduced.

Effects on the Unbanked and Underbanked

Another argument against removing pennies is that people who are unbanked and underbanked tend to use cash more often. Therefore, eliminating pennies will hurt the group relying primarily on cash for daily transactions. There are several issues embedded in this argument.

1. Older people and unbanked groups use cash more often than the general population. However, discontinuing penny production does not equate to a cashless society. Other forms of legal tender would continue to be issued, allowing consumers to use them for payments.
2. A Federal Deposit Insurance Corporation (FDIC) report shows that 4.5% of U.S. households were unbanked in 2021. Among the unbanked, the primary reason (cited by 28% of responders) for not having a bank account was economic factors, such as insufficient funds to meet minimum balance requirements and high account fees.
3. A significant portion of the unbanked population chooses not to have a bank account. Nonfinancial reasons, including privacy concerns and distrust of banks, account for 22% of the unbanked population.

This suggests that, to effectively reduce the unbanked population, policy responses should address both financial inclusion and the lack of trust in banks within this group.

Potential for Nickel Elimination

Some are concerned that removing pennies could be a precursor to eliminating nickels (five-cent coins), which also cost more to produce than their face value. The U.S. Mint’s 2024 annual report reveals that 202 million nickels were minted in 2024, at a production cost of 13.8 cents per coin. When factoring in administrative costs, the total loss amounted to $17.7 million.

However, it is not a foregone conclusion that nickels will be phased out if penny circulation is reduced or eliminated. As the U.S. Mint suggested, the reduction of penny circulation could occur over a multiyear period to alleviate concerns about price level changes. In the meantime, the government can carry out studies to investigate the economic effects of removing pennies.

Rise of Central Bank Digital Currencies (CBDCs)

Others take this argument one step further, suggesting that removing pennies could be a stepping stone for the federal government to introduce its own digital cash (such as Central Bank Digital Currencies, commonly known as CBDCs). However, it is a big leap from eliminating pennies to making government digital currency a form of legal tender.

The former primarily addresses cost-benefit concerns, while the latter involves a range of technological, privacy, and socioeconomic factors. It is also important to note that while Trump has directed a halt to penny minting, it is Congress — not the Treasury or the Federal Reserve — that holds the authority to decide whether to retire the coin. Similarly, incorporating digital currency into legal tender would require congressional action.

Reform Proposals

Several congressional proposals, including one in 1989 and another in 2017, have sought to optimize coin circulation by eliminating pennies. These proposals generally received bipartisan support, and in 2013, former President Barack Obama signaled he was open to the idea, commenting that if the government can eliminate things that do not work, the money saved can be invested in things that do.

A proposal in 2023 took a different approach, seeking to allow the U.S. Mint to change the metallic composition of circulating coins to save taxpayer money. However, this proposal did not advance.

International Experience

Other countries have already been through the debate of whether to retire their penny or its equivalent. Canada, for instance, removed its one-cent coin in 2012. Around a dozen countries have also removed their lowest or second-lowest denomination coins from circulation, typically ceasing production and gradually phasing them out.

• In 1990, Australia announced it would stop producing one- and two-cent coins, and these were removed from circulation in 1992. The government cited economic reasons, primarily inflation and the cost of minting these coins.
• In 2002, South Africa ceased minting one- and two-cent coins. Existing coins remained legal tender and were still required to be accepted.
• In 2002, Singapore stopped producing one-cent coins due to their low usage. Coins still in circulation remained legal tender.
• Over the last two decades, several EU countries, including Estonia, Finland, the Netherlands, Ireland, Italy, Belgium, and Slovakia, stopped using one- and two-cent Euro coins. They cited negative seigniorage and environmental concerns as the main drivers for their decisions.

Other Considerations

In addition to economic reasons, several other arguments have been made for and against eliminating pennies, including:

• Polls — Both supporters and opponents of eliminating pennies have referenced polls to support their views. Some polls show public disapproval of removing pennies, while others favor their elimination, making the overall results inconclusive.
• Sentimental Value — Pennies hold sentimental value for many, from evoking memories of childhood experiences to the tradition of tossing a coin into a foundation to make a wish.
• Cultural and Historical Significance — Decisions about currency design and circulation are often influenced by societal factors:
  • Early efforts to eliminate the penny faced resistance due to its image of Abraham Lincoln, a revered figure and the first president to be featured on a coin.
  • In 2016, former Treasury Secretary Jacob Lew considered removing Alexander Hamilton from the $10 bill. The widespread popularity of the musical “Hamilton” and its millions of fans played a significant role in keeping Hamilton on the bill, though this decision was more about the design than economic factors.

A Penny Saved, A Penny Gained?

The primary economic argument for eliminating the penny is straightforward; it costs more to produce a penny than its face value. There are also potential environmental benefits to ceasing the production of these low-denomination coins.

Currencies are designed to facilitate transactions, yet pennies have lost much of their original purpose. Their value has significantly diminished, making them increasingly irrelevant in modern commerce.

Given the nation’s growing debt and the need to allocate resources to critical policy areas — such as Social Security, Medicare, and expiring tax provisions — continuing to mint and circulate pennies appears to be an unnecessary expense.

This publication was produced on behalf of Rice University’s Baker Institute for Public Policy. Wherever feasible, the material was reviewed by external experts prior to its release. Any errors are the responsibility of the author(s) alone. 
 

This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author(s) and Rice University’s Baker Institute for Public Policy. The views expressed herein are those of the individual author(s) and do not necessarily represent the views of Rice University’s Baker Institute for Public Policy.