Debunking the COLA myth

The beginning of each fiscal year brings another Cost of Living Allowance change based on spendable income.

SI is comprised of an average servicemember’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 KMC will see a daily decrease of $1.50 in their COLA.
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 received: pay grade, number of dependents, years of service and location, to name a few. In addition, some economic factors come into play: Living Pattern Survey, Retail Price Schedule, currency fluctuations and spendable income.
COLA you receive is based on two surveys. The LPS survey, which is open to all overseas servicemembers during the survey period, is web-based and conducted once every three years (Germany’s LPS is scheduled for November 2008). This 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. 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 mean 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.  
Plan for COLA fluctuations in your personal budgets.
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