STUTTGART, Germany — Most servicemembers in Germany can expect about a $200 cut in their monthly cost-of-living allowances this year as a result of rising prices for goods in the U.S., where inflation has outpaced that in Germany, according to the Department of Defense’s Per Diem, Travel and Transportation Committee.
Troops in Belgium and the Netherlands will experience similar declines, which have been postponed for two years pending the outcome of a U.S. European Command-requested study on the methods for calculating COLA. That review is now finished, and the results call for curtailing the allowance.
The reductions won’t come all at once, however, but will be phased in between May and August to soften the impact.
"That will give them (servicemembers) time to adjust themselves financially," said Deborah McKoy-Phillips, EUCOM’s military entitlement program analyst.
The one exception in Germany is for soldiers serving in Vilseck, who, along with troops in the United Kingdom and Italy, are exempt from the reductions based on local prices and available services, according to EUCOM. An exact reason wasn’t available why Vilseck is exempt from the decrease.
Otherwise, the pocketbook impact for an E-6 servicemember with three family members translates into a monthly COLA rate drop from $628 to $418.67 by the end of August, according to the military.
Based on annual survey data and inflation data collected in the U.S., the purchasing power gap has narrowed from 24 percent to 16 percent during the past two years in Germany, Belgium and the Netherlands, according to EUCOM.
On average, each percentage point equals roughly $25 in COLA funds, though rates vary depending on rank, number of dependents and years of service, McKoy-Phillips said.
COLA is designed to help offset costs for troops overseas to ensure they maintain the same purchasing power as their stateside counterparts.
In a sense, troops in Germany have lucked out for the past couple of years. Servicemembers avoided a 4 percent cut in 2007 and another 4 percent cut in 2008, since rates were held in check as the outside assessment on COLA calculations was performed in Europe, EUCOM said.
"These reductions that are coming were delayed for a couple years," said Lt. Col. Julie Boit, strategic plans and policy chief for EUCOM. "We’ve had that additional buying power."
Gen. John Craddock, EUCOM commander, called for a blue ribbon panel in 2007 to look at the process for calculating COLA amid concerns that troops weren’t getting sufficient compensation. The Defense Department granted the request for an outside review and commissioned a study, which was concluded in late 2008. The findings, however, confirmed that indeed COLA rates should have gone down.
Post allowance received by civilians was not included in the study and has continued to be adjusted each year.
The Per Diem Committee in Washington annually adjusts the COLA baseline based on the price of goods and services where overseas troops shop and compares it to costs for similar services in the U.S.
During the past couple of years, commodities such as food in the U.S. have experienced a price spike.
The Consumer Price Index for food increased 4 percent in 2007, the highest annual increase since 1990, according to the U.S. Department of Agriculture’s economic research center. And in 2008, the rate climbed even higher—hitting 5.5 percent last year.
As those costs go up and outpace the rate of inflation in host countries, COLA will in turn drop.
But prices aren’t the only factor in setting COLA rates, which also get adjusted every two weeks based on currency fluctuations. For much of 2008, the dollar gained ground on the euro, which meant slight declines in COLA through the course of the year.
In a sharp reversal last week, the dollar had its worst decline in 25 years in response to the Federal Reserve’s plan to purchase $300 billion in Treasury bonds. What impact such dramatic swings in exchange rates will have on the twice-a-month COLA adjustment remains to be seen.
"There’s no telling what the economy and euro rate will do," Boit said.
