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QRMC: Overseas COLA rules penalize shoppers

A Pentagon-sponsored pay study says the relative size of exchanges and commissaries on U.S. installations abroad should factor into the Overseas Cost-of-Living Allowance to prevent unintended declines in that monthly payment.

Overseas COLA is paid to more than 250,000 service members at about 600 locations overseas, including Alaska and Hawaii, at a cost of $1.7 billion per year.

Designed to maintain the purchasing power of service members assigned to overseas locations where the average cost of living is higher than in the U.S., the allowance is based on location, whether members live on or off base, and their levels of disposable income based on rank and number of dependents.

Basic rates are set for each overseas location using two annual surveys: a comparison of a “market basket” of similar goods and services in the U.S. and at overseas locations, and a “living pattern survey” in which troops provide data on how much of their disposable income they spend on and off base.

Once an index is set for each location each year, rates can be adjusted as often as every two weeks to reflect fluctuations in foreign currency exchange rates.

Retired Air Force Brig. Gen. Denny Eakle, executive director of the 10th Quadrennial Review of Military Compensation, said that when overseas prices go up off base, families begin to shop more often on base.

The problem, she said, is that when service members report this shift in shopping habits on the annual living pattern surveys, they unintentionally drive down allowance rates.

If they’re spending more disposable income on base, Overseas COLA rates will decline. When the rates decline, troops will be driven to shop on base even more — further driving down rates. In effect, service members are “penalized for making wise financial choices,” Eakle said.

This is the same kind of death spiral that afflicted the stateside military housing allowance when it was based on annual surveys of troops’ housing choices — before creation of the Basic Allowance for Housing, which is based on independent surveys of actual average rental costs.

The kind of changes in shopping patterns driven by shifts in Overseas COLA rates are not seen to nearly the same degree among U.S.-based troops who get the Continental U.S. Cost-of-Living Allowance, because stateside prices usually rise and fall in tandem on and off base, providing less incentive to change shopping routines.

The QRMC’s suggested solution is to use the same methodology for Overseas COLA that is used for ConUS COLA.

The stateside allowance takes into account the idea that troops with access to large commissaries and exchanges typically will spend a larger share of their disposable income on base, and those with small or no military stores nearby will spend more off base — and adjusts the market basket that underpins the allowance accordingly.

Along with making both COLA programs more consistent, such a move “would halt the seesaw effect” of troops abroad shifting a portion of their shopping money to the lowest-price alternatives, the QRMC said.

“The prices off base would still continue to influence the [Overseas] COLA exactly as they should,” Eakle said.

“So as those prices go up, that part of their market basket would continue to go up, and they would continue to be paid COLA at higher rates.”

The QRMC study also notes that a “significant issue” with the highly complex Overseas COLA appears to be “a lack of understanding” about its purpose.

“It appears that members do not have a clear understanding of how the allowance is formed and how it changes over time — particularly those changes that cause a decline in the allowance,” the report says.

When Overseas COLA declines, it can be “disconcerting” to troops who may be observing local prices headed upward, the study says.