Understanding COLA: Calculating adjustments can be a complex and confusing chore
January 16, 2005
BAUMHOLDER, Germany — As the dollar rebounds a bit from record lows against foreign currencies, most servicemembers assigned overseas know they get cost-of-living allowance adjustments to help ease their financial pain.
Few, however, understand exactly how the government makes up for lost purchasing power, especially when it comes to currency fluctuations. And hardly anyone knows, for example, why a soldier in Germany gets a different adjustment than his Air Force counterpart in Italy.
When Stars and Stripes ran an article in November about U.S. Army Europe soldiers getting a cost-of-living adjustment averaging roughly 31 percent, e-mails came in from across Europe asking, “Where’s my money?”
“I am just asking the question for us folks in Italy,” Senior Master Sgt. Stan Nowacki, 704th Munitions Support Squadron, Ghedi Air Base, wrote in an e-mail. “Is our COLA going to go up like those in Germany?”
In a follow-up phone interview, Nowacki said that Ghedi, a geographically separated unit, has no commissary or base exchange, and is in an expensive resort area west of Verona. Yet his COLA is only about $100 more per paycheck than if he were based in Aviano, a full-service base.
Servicemembers stationed at the four major military hubs in Italy — Naples, Sigonella, Aviano and Vicenza — all received some kind of boost in the COLA rates in November. But they were all different and some came at different times.
In Sigonella, for instance, the big boost was 22 percent on Nov. 1. Naples’ increase was also Nov. 1, but the jump was only 8 percent. Vicenza’s rate rose only 12 percent, while Aviano had an increase of 26 percent on Nov. 1 and got two other increases after that.
The total rate of COLA that servicemembers received in each area wasn’t readily available. But those stationed in Naples, a large metropolitan area, receive more than those in Aviano, a largely rural environment.
‘Weak dollar’ factor
If COLA rates were based only on currency fluctuations, they’d be uniform across countries using the euro. Instead, the rates vary widely because there’s far more to setting COLAs than the value of the dollar, including rank, years in service and number of dependents.
That said, in Europe, the big news is the shrinking dollar. Since 2002, the dollar has dropped about 38 percent against the euro, and nearly 10 percent since September.
In November 2002, one dollar bought roughly one euro. In early January 2005, it cost $1.35 to buy one euro, and the dollar is worth about 74 euro cents. However, on Thursday, the dollar jumped .97 percent to $1.3078 per euro on some currency trading markets.
During 2004, the allowance rate for the euro was adjusted 11 times in Germany, stated Roy Sammarco in an e-mail response to a Stars and Stripes query. Sammarco is chief of the Per Diem, Travel and Transportation Allowance Committee’s economic and statistics branch, which sets allowances for the Department of Defense.
Periodic cost-of-living adjustments help keep the buying power of overseas American military personnel roughly the same as stateside counterparts, even when the value of the dollar fluctuates, Sammarco wrote. The per diem committee tracks currency data at different intervals, and may change COLAs “based solely on fluctuations in the rates of exchange,” he said.
For example, if the dollar’s value has changed by 5 percent by the 8th of the month, the change shows up on midmonth paychecks; for for end-of-month paydays, the change is marked on the 23rd.
Though it’s impossible to instantly survey all the economic factors and then change paychecks instantly, over the long run, COLAs even out dollar fluctuations, Sammarco said. There may be timing issues that affect just when approximately 300,000 soldiers at 600 overseas locations will see the adjustments, and the per diem committee may have to fine-tune the process during periods when the dollar’s value is changing rapidly, he said. Over- or underpayments should be corrected within an eight-week period.
Over the long run, the hypothetical soldier shouldn’t be gaining or losing real income because of currency changes or other financial factors, but simply maintaining his salary’s purchasing power as the COLA makes up for — in the current circumstances — the dollar’s diminishing value, according to Sammarco.
Myriad other variables go into calculating COLA beyond the value of the dollar against foreign currencies, according Army documents and interviews with officers and civilian finance officials knowledgeable about COLA.
One major COLA factor is base category: full support with exchanges and commissary, partial support, no support or remote. Living on bases with no alternative to shopping on the local economy means larger COLAs.
Another variable is prices at Any Base, USA. While the dropping dollar is part of the COLA equation, so are consumer prices back in the United States. If prices rise because of increasing gas prices for producers and shippers, that could cause cost-of-living adjustments to decrease for soldiers overseas if German prices remain the same. Because remember, COLAs are about making sure that hypothetical soldier has the same buying power whether he’s assigned to relatively inexpensive Fort Campbell, Ky., or comparably expensive USAREUR headquarters in Heidelberg, Germany.
Further, just how much American personnel are buying off base figures into the calculation. Once every three years, the Defense Department conducts a Living Pattern Survey, analyzing what percentage of personnel shop off base, where they shop, the products they buy and the prices they pay, according to Susan Brumbaugh, chief of overseas COLA for the per diem committee. Bases where a higher percentage of personnel shop on the local economy receive a larger adjustment than bases where more people shop on base.
The next Living Pattern Survey for Germany is due this year, said Maj. Susan Walton, deputy director of finance operations at the 266th Finance Command headquarters in Heidelberg.
Retail price schedule surveys track the actual prices for 120 goods and services off-base and on-base and compare them to U.S. prices. In Germany, for example, base support battalions and area support groups conduct the surveys at Ramstein, Heidelberg, Geilenkirchen, Vilseck and Schweinfurt.
Is there one factor that’s most important? Not really, say the experts. But currency fluctuations can cause dramatic changes quickly.
In the late 1970s, the growing value of the yen against the dollar caused almost comical imbalances between host county and U.S. forces, said Winslow Wheeler, then a congressional staff aid, now a visiting senior fellow at the Center for Defense Information, a Washington public policy institute.
“For a while, the Japanese sergeant on the base gate had a higher yen salary than the American base commander,” Wheeler said.