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COLA Breakdown

BLUF:

 

  • COLA is determined by where members shop, how much those goods and services cost and the exchange rate.

  • COLA provides buying power for items like clothing, transportation, recreation, home furniture, etc.

  • Paychecks are always changing since COLA rates fluctuate regularly. Base your expenses off of base pay rather than your current paycheck.

  • COLA calculator link: http://www.defensetravel.dod.mil/site/colaCalc.cfm

     

     

In 2016, the COLA index has fluctuated from 124 in January 2016, to as high as 140 in September, followed by a drop back down to 124 in December.  These fluctuations have left members scratching their heads as they try to understand the reason for the changes.  The intent of this article is to explain the purpose of COLA, what inputs affect changes in the COLA index, and why pay outs have fluctuated so greatly in 2016.  We’ll start with the basics.

 

The overseas Cost of Living Allowance (COLA) is a non-taxable supplemental pay allowance, designed to equalize purchasing power so members can purchase the same level of goods and services overseas as they could if they were stationed in the states.  It is calculated by comparing prices overseas with average prices of equivalent goods and services in CONUS.  In December 2016, the Misawa COLA index was 124 (sometimes represented as 0.24), meaning on average it costs 24% more to purchases goods and services here than in the states.  As a result, you were paid COLA at a rate increasing your spendable income by 24%.  (more to follow on spendable income at the end of this article)

 

The amount of COLA you see in your paycheck is affected by 2 main factors: (1) your spendable income and (2) the COLA index.  Your spendable income depends on your rank, years of service, number of dependents and whether or not you live in the dorms.  Basically, higher salaries require higher COLA payments in order to bring your spendable income in balance with CONUS levels.  You can see these inputs as you use the online COLA Calculator.  http://www.defensetravel.dod.mil/site/colaCalc.cfm

 

The COLA index is determined by the Defense Travel Management Office (DTMO) using 3 primary inputs:

 

  1. Retail Pricing Schedule (RPS) – an annual survey that reports the prices of an approximately 120 item “market basket” of goods and services.  On and off base prices are reported in this survey. 

  2. Living Pattern Survey (LPS) – This survey is usually completed every 3 years and asks members where they shop for various goods and services.  In answering the where we shop question, DTMO is able to understand where to account for the increased cost of living.  The on/off base ratio, as determined by this survey, breaks our COLA into 2 pieces; a portion representing the increased cost of purchases on base and a portion representing the increased cost of purchases off base.     

  3. Currency Exchange Rate – DTMO collects exchange rates and makes changes to the COLA index as much as every pay period as the buying power of the US Dollar versus the Japanese Yen fluctuates.  Exchange rates do not affect your entire COLA payment.  It only affects the portion of spendable income spent off base, as reported by the LPS above.

     

Keep in mind, COLA is not just about buying groceries.  It takes into account a ‘market basket’ of approximately 120 items also including clothing, personal care, household furnishings/appliances, medicine, recreation, public transportation, vehicle expenses, childcare, and even alcohol and tobacco.  This ‘market basket’ represents typical purchases of a military member overseas.  A common sentiment is, “(insert expensive commissary item here) costs 200% more here than in the states.  Why isn’t my COLA paid at this same rate?  The answer is that the RPS takes into account prices of the array of items in the ‘market basket’, not just those extraordinarily expensive items.  Unfortunately, if you’re purchasing a disproportionate amount of these items then your COLA may not be sufficient. 

 

In 2016, the vast majority of COLA index changes were due to fluctuating currency exchange rates.  In fact, only one COLA index change was due to a survey input.  This occurred in November 2016 where the COLA index changed by 2 points reflecting the results of the June 2016 RPS.

 

So if the exchange rate changed 11%, why has my COLA payment dropped by nearly 40%?  It is hard to understand the affect exchange rates have on COLA payments by only looking at these 2 numbers.  You must look back to the purpose of COLA to grasp the big picture.  The purpose of COLA is equalize purchasing power so members can purchase the same level of goods and services overseas as they could if they were stationed in the states.  Purchasing power is driven by your spendable income.  Spendable income is the amount of money, based on the Department of Labor statistics, that a typical military member overseas will spend on a regular basis and can be calculated using the instructions in the Joint Travel Regulation (JTR), Appendix J.  As mentioned before, if the COLA index is 124 then your COLA payment will be 24% of your spendable income.  Adding this COLA payment to your previous spendable income yields a new spendable income that allows for members overseas to purchase the same level of goods and services as in the states.

 

Now to the calculations…  For example, an E-6 with 12 years of service and 3 dependents has an approximate spendable income of $3,200 per month.  If the COLA index is 140, as was the case in September 2016, your COLA payment will be $1,280 (3200 x 0.40).  If the COLA index decreases to 124 then your new COLA payment is $768 (3200 x .24).  That’s an 11.4% change in the COLA index and a 40% decrease in COLA payments!  The reason the COLA payments change so drastically is because the purpose of COLA is to adjust your overall spendable income to the appropriate level.  Your spendable income, after receiving your COLA payment, changed from $4,480 (3200 + 1280) to $3,968 (3200 + 768); an 11.4% change.  So, although your COLA payment changed a lot, your overall spendable income changed by the exact amount reflected by the COLA index.

 

For more information on COLA including Frequently Asked Questions (FAQ) and the COLA calculator, please visit the DTMO website at https://www.defensetravel.dod.mil/site/cola.cfm.