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Penny to die, but GST, HST to still be calculated to cent

The Globe and Mail

(Adrian Wyld)

These are stories Report on Business is following Thursday, March 29, 2012. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

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The penny drops (and every other cliché you can think of) There's a lot to digest in the budget unveiled today by Canada's Finance Minister Jim Flaherty. Not least of which is the fact that we won't have the penny to litter our dressers anymore.

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Well, it took long enough for the Canadian government to get rid of it.

It was more than five years ago that a widely quoted study from Desjardins tallied the cost of using the cent and recommended scrapping it.

Then last year, a Senate committee came to the same conclusion, saying it costs a half-penny more to make a penny than it's worth. Mr. Flaherty himself calls it a "nuisance." Today, he announced plans to phase it out. The last one will be cast in April, a move that will save the government $11-million a year.

No big deal. What use is the coin anyway? In mid-February, 2007, when Desjardins issued its lengthy report, it pointed out then that it costs at least $130-million a year - that’s more than $4 per person - to keep it in circulation. Rounding off to the nearest nickel was the way to go, its authors argued.

“The penny has so little purchasing power that more and more Canadians are refusing it as change for their purchases,” Desjardins said. “They instead make them available to the retailer and next customer by placing them in a container near the cash register for this purpose. Other consumers accumulate large quantities of pennies and rarely take the time to roll them and bring them to the bank. Others simply throw them away.”

Here’s what the researchers found:

  • The number of loonies in circulation since 1987, when the paper money was replaced, reached 852 million by the end of 2005. The number of toonies, introduced in 1996, reached 554 million by 2005. Together, the coins represented $1.96-billion, equal to 61 loonies per capita at the time. “ Over the five years from 2001 to 2005, the value of these two coins has increased at a relatively stable pace that is compatible with nominal GDP (approximately 5 per cent).”
  • For pennies, the researchers calculated that the total number issued since 1908 had reached 30.5 billion coins, or almost 953 pennies per capita, by the end of 2005. In the 2001-2005 period, the government issued an average 816 million pennies a year, or more than 25 per capita.
  • “These figures on the number of pennies in circulation and on their annual increase show clearly that the one-cent coin is not very useful and that consumers hoard or throw it away rather than deposit it and put it back into the distribution system.

"Pennies take up too much space on our dressers at home," Mr. Flaherty said today. "They take up far too much time for small businesses trying to grow and create jobs."

Here's how the government put it today: "Due to inflation, the penny's purchasing power has eroded over the years. Today it retains only about one-20th of its original purchasing power. Given its declining purchasing value, some Canadians consider the penny more of a nuisance than a useful coin. We often store them in jars, throw them away in water fountains, or refuse them as change."

The government outlines on its website how it's going to work, following the experience of other countries, by rounding up or down. The penny will still exist as a concept, so to speak, and rounding will only be involved in cash deals. So it still exists for cheques, and credit and debit transactions.

And you knew this was coming: GST and HST will still be calculated to the penny and added into the price. Only the overall total will be rounded.

Whatever will Leon's do now? Don't-pay-a-nickel event just doesn't have the same ring.

When I'm 67 (with apologies to the Beatles) I have four kids, two cats, a house in Toronto, a minivan, a flat-screen TV, four cellphone contracts and a specialty television sports package that my daughter wanted, so I wasn't getting out of here at 65 anyway.

But for those of you who actually planned out your life when you were younger, you're being asked today to rethink retirement at 65 and think about 67 instead. The changes will be phased in, starting in April of 2023. So they won't affect Canadians 54 and up, which actually would let me off the hook. Thus the burden falls to younger people.

Finance Minister Jim Flaherty announced plans in his budget to push back Old Age Security benefits to age 67 from 65. The idea is to phase in the changes to the more than $6,000-a-year benefit as the government addresses the issue of sustainability.

What might that mean?

"Such a move could increase economic growth, as it would entail less labour force deceleration than we would otherwise see ahead," said Avery Shenfeld, chief economist at CIBC World Markets.

"Longer term, economic growth is tied to gains in productivity and the growth in the size of your work force. The 'cost' of a trend to working later into life is the loss of leisure time, which isn't captured in GDP, the measure we typically use as a proxy for economic well-being. Note that individuals could still retire earlier, which is still likely in the most physically demanding jobs."

They'll just have to have enough in pension or savings, he said.

Europe has been grappling with this very issue, though it's obviously a much different situation. And unemployment in many countries is running at far higher levels than in Canada so job creation is a bigger issue given that Mr. Flaherty's won't kick in immediately.

In Germany, a retirement age of 67 isn't popular but has "generally been accepted" and doesn't appear to be a problem given the country's relatively low jobless rate, said Michael Hewson, senior market analyst at CMC Markets in London.

"In France, on the other hand, attempts to raise the retirement age have been greeted with fierce resistance where the age was raised from 60 to 62 in 2010 to reflect rising pension costs as people are living longer," he said.

"Here in the U.K. there is uproar amongst U.K. public sector workers who are being asked to pay more to fund their retirements once again for the same reason as policy makers start to grapple with the economics of an ageing population and a shrinking tax base," Mr. Hewson added.

"Unlike Canada the U.K. private sector is already having to wrestle with pension deficits caused by tax raids by previous governments and underperforming equity markets. It is a demographic time bomb in Europe and while it needs to be tackled there continues to be a lot of debate about how it will be funded."

For men watching for the budget, here's something extra from three researchers at the University of Zurich who studied early retirement among blue-collar workers:

"We find that a reduction in the retirement age causes a significant increase in the risk of premature death - defined as death before age 67 - for males but not for females. The effect for males is not only statistically significant but also quantitatively important. According to our estimates, one additional year of early retirement causes an increase in the risk of premature death of 2.4 percentage points (a relative increase of about 13.4 per cent; or 1.8 months in terms of years of life lost) ... Our results also indicate that the causal effect of early retirement on mortality for females is zero, suggesting that the negative association between retirement age and mortality in the raw data is entirely due to negative health selection."

They were talking about blue-collar workers, who they found typically work in "physically demanding" jobs and whose health problems often force them into early retirement.

They also suggested that changes in lifestyle - smoking, drinking, bad diet and a lack of exercise - may play a role. So, too, may lower income.

One more thing from the study. And I'm not commenting here on whether the government's right or wrong, simply pointing it out:

"Our results suggest that early retirement does not only adversely affect government budgets. Early retirement may also have adverse consequences by increasing individuals’ mortality risk. A major implication of our analysis is that labour-market policies that keep older individuals at work have a double dividend. They will contribute to an improvement of government budgets and they will raise individuals’ welfare by prolonging their lives. As long as workers can be kept in employment, increasing the retirement age will improve government budgets, though not one-for-one as longer lifetimes will increase social security expenditures in the future."

So, ask not what your country can do for you ...

Austerity-lite Overall, the government unveiled a budget that speeds up deficit-reduction amid faster-than-expected cuts. It also extends the hiring credit for small businesses, a good move, and allows you to bring home more from the United States without paying duty. It also limits increases in premiums for Canada's Employment Insurance program.

"Aside from the well-advertised changes to Old Age Security (OAS) and the decision to eliminate the penny, it is far from a watershed document," said Douglas Porter and Robert Kavcic of BMO Nesbitt Burns.

"Additional restraint measures are relatively moderate ('modest' in the Finance Minister’s words), and they are partially offset by new steps to support employment and business investment," they said in a report titled "Austerity-lite."

"Indeed, the budget goes out of its way to soft-pedal its restraining aspects. The revised fiscal outlook provides strong justification why a go-slow approach is entirely appropriate - the underlying deficit trajectory is running $6-billion per year better than expected, simply because the economy is operating about as expected (i.e heavy layers of prudence have not been required after all)."

RIM in spotlight If that's not enough to bring you down, as my generation would put it, consider the shareholders of Research In Motion Ltd.

As The Globe and Mail's Iain Marlow reports, the BlackBerry maker reported another weak quarter and announced a strategic review of the company, sending its shares tumbling in after-hours trading before they recovered some ground.

In results grimmer than many expected, the company said it brought in $4.2-billion in revenue, which is well below its guidance of at least $4.6-billion. It also plans to stop issuing guidance.

"The company expects continued pressure on revenue and earnings throughout fiscal 2013," RIM said.

"Due to a desire to focus on long term value creation and the current business environment, RIM will no longer provide specific quantitative guidance. Some of the factors contributing to this include, ongoing weakness in the company's U.S. smartphone business, an increased focus on selling BlackBerry 7 smartphones to grow the subscriber base in advance of the BlackBerry 10 launch, increasing competitive pressure in the company's international markets and the introduction of certain new lower tier service pricing initiatives and a higher mix of sales coming from entry level products."

RIM lost $125-million or 24 cents a share, diluted, in its fourth quarter, compared to a profit of $934-million or $1.78 a year earlier.

"In addition to delivering the BlackBerry 10 platform and refocusing resources on RIM's key opportunities, such as BlackBerry Mobile Fusion and new integrated service offerings, we will also drive greater operational performance through a variety of initiatives including increased management accountability and process discipline," said its new CEO, Thorsten Heins, as he looked ahead.

"In parallel, we are undertaking a comprehensive review of strategic opportunities including partnerships and joint ventures, licensing, and other ways to leverage RIM's assets and maximize value for our stakeholders."

I'll take Manhattan Toronto-Dominion Bank wants to become the third-largest bank in New York City within the next few years, The Globe and Mail's Grant Robertson reports today.

Speaking at the bank’s annual meeting, held simultaneously in Manhattan and Toronto, chief executive officer Ed Clark said TD intends to continue bulking up New York, adding 50 new branches and hundreds of new staff.

The move would catapult Canada’s second-largest lender into the highest tier of U.S. consumer banks in New York City, among the likes of JPMorgan Chase and Citigroup, which are first and second in terms of branches.

OMERS buys into HootSuite OMERS Ventures, the pension plan’s venture capital investment arm, is buying a $20-million interest in Vancouver-based HootSuite., The Globe and Mail's Tara Perkins reports.

‪The deal, one of the largest Canadian venture capital transactions of the past decade, is being done by way of a secondary purchase from HootSuite’s existing shareholders.‬

Ball's in Augusta's court It stuns me that we're actually still talking about such things in 2012, but we are.

The Augusta National Golf Club is faced with a choice of whether to admit the first woman in 80 years as a member as the Masters Tournament draws near.

In this case, she's Virginia Rometty, the new chief executive officer of IBM Corp. .

IBM is one of the sponsors of the Masters, and the IBM chief has traditionally been invited into the club. Traditionally, of course, she has been a he, and gets to wear Augusta's green jacket and host guests at its hospitality cabin at about the 10th hole.

For Augusta, women have a place at the Masters, in the kitchen of the hospital cabin. I love the fact that they're about to get dragged into the 20th Century, given everyone else is in the 21st.

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