Debunking the COLA Myth

  • Published
  • By By Master Sgts Joanna Ogden and Keibu Kamarakafego
  • U.S. Air Forces in Europe Financial Management
RAMSTEIN AIR BASE, Germany --  When arriving overseas you probably noticed an additional item on your pay statement entitled COLA or Cost of Living Allowance. What is COLA and why do we receive this allowance? COLA is intended to maintain your purchasing power so you can purchase similar goods and services overseas as in the United States. COLA is designed to offset the higher prices of goods and services at most overseas locations. There are a number of factors that impact the amount of COLA you receive: your grade, number of dependents, years of service and location to name a few. In addition, some not so obvious economic factors also come into play. These include the Living Pattern Survey, Retail Price Schedule, currency fluctuations and spendable income.

You may wonder how an office in Washington D.C. can determine the amount of COLA you receive. Their determination is driven by two major surveys. The first survey is the LPS which is open to all overseas service members during the survey period. The LPS is web-based and conducted once every three years (Germany's LPS will be conducted in November 2008). This survey asks where you shop and asks that you attach a percentage to the amount of shopping you do both on and off base. The second survey is the RPS which is conducted annually and collects the prices of 120 goods and services such as fruits, vegetables, clothing, auto insurance and childcare costs to name a few. The stores where prices are collected are derived from where you indicated you are shopping within the LPS. These costs are then compared to similar items in the United States and if the costs are greater than in the U.S., a COLA is paid.

Another factor contributing to COLA fluctuations is foreign currency changes. The U.S. dollar typically strengthens or weakens against foreign currencies daily, but that doesn't necessarily translate into a daily COLA change. Because of the constant fluctuation in currencies members will either be overpaid or underpaid COLA for about half of the year. This is done to provide stability in the member's pay check and over the course of the year COLA will balance out. For extreme instances, COLA does have the built-in flexibility to adjust as often as every two weeks based on the exchange rate. For fluctuations in the exchange rate, COLA is adjusted only for the portion of income that the member spends in the overseas economy and not for their entire base pay.

The beginning of each fiscal year brings another COLA change based on Spendable Income. SI is comprised of an average service member's total regular military compensation minus housing allowances, taxes, savings, life insurance, gifts and contributions. Rising costs in the U.S. cause SI to go down stateside. This decrease in SI typically results in a slight decrease in COLA. Everyone will feel the effect of this decrease. For example, an E-5 with two dependents in the Kaiserslautern Military Community will see a daily decrease of $1.50 in their COLA.

The bottom line is that COLA is there to help you maintain the same purchasing power overseas as you would have in the US. You should plan for COLA fluctuations in your personal budgets.

Additional questions can be directed to your local finance office. Alternatively, the Per Diem Travel and Transportation Allowance Committee's website provides a wealth of information and can be found at: http://perdiem.hqda.pentagon.mil/perdiem/faqcola.html