Understanding the Annual Cost of Living Adjustment (COLA)


What is COLA? 

Before we get started, we need to explain COLA. The acronym actually has two different meanings. One is the Cost of Living Allowance that is given to families who live overseas. It is an allowance that helps military salary retain its purchasing power in a location where cost of living is high.

The second is a Cost of Living Adjustment and that’s the one we want to address in this article.

COLA is given each year and is meant to help salaries keep up with the rate of inflation. The amount of COLA is pre-determined by this law, Title 37, Chapter 19, Section 1009. Technically, the adjustment is tied to the Employment Cost Index, a Bureau of Labor Statistics figure, and should happen automatically each year.

If that was the case, then in 2016, military salaries would raise by 2.3% across the board. Simple, right?

Why COLA isn’t automatic 
Not so simple. The law is written with an exception. The President can change the COLA in any given year for reasons of national emergency or serious economic conditions. He must submit his new plan to Congress before September 1 and in this plan he must include reasons for the exception and explain how this exception will affect recruitment and retention.

Generally, Congress considers the President’s request and uses that number in the National Defense Authorization Act each year. While Congress could spend time debating this number, there is little political will to do so as it sets up a fight they think they will eventually lose. After all, the President can easily change the set amount without their approval. But then he loses political will with the people rather than Congress themselves.

Sometimes Presidents and/or Congress make changes that work in the favor of service members. In the early 2000’s, military salary was considered very low in comparison to civilian salaries. Congress and the President decided to give adjustments greater than the rate of inflation to bring active-duty salaries in par with their civilian counterparts. In fact, when the adjustment is greater than the rate of inflation, it is fair to call it a raise.

Then something interesting happened in the United States. We had an economic downturn that chipped away at the purchasing power of civilian salaries while military service members continued to receive COLA that kept their salaries healthy. Although military salaries never gained equity with civilian salaries, they came close. At this same time, the Department of Defense began claiming that personnel costs were taking over the defense budget, a claim that the Military Officer’s Association of America (MOAA) and other military community organizations has repeatedly proven false. In fact, MOAA studies show that personnel costs have maintained a straight 30% of the budget for decades and that the growth claimed by the DoD comes from inappropriately starting their data point in the early 2000’s when Congress needed to retain troops.

Despite solid arguments made by organizations like MOAA, the DoD is winning the advertising war and has convinced politicians that without slowing down the growth of salaries, the defense budget will be in jeopardy. Everyone at the top, from former Secretary of Defense Chuck Hagel to former Army Chief of Staff Ray Odierno to current Joint Chief of Staff Martin Dempsey, have claimed that personnel costs will be the end of our modern all-volunteer force. What they decry most is that each modern soldier, sailor, airman, and Marine costs more in total compensation than the men and women who served before them. Yet they seem not to take into account that individuals in our modern military are better educated and better trained than ever before. Retaining such caliber requires competitive salary and benefits. Despite each servicemember costing more, the total of all personnel costs is still 30% of the overall budget.

The Future of COLA 

If the DoD has its way, COLA will be below the rate of inflation for many years to come. The pattern is already set. The last two years, military salaries have seen adjustments of 1% while the rate of inflation was 1.5% and 1.7% respectively. This year, the raise is projected to be 1.3% while the rate of inflation is 2.3%.

In practice, military salaries have lost purchase power for three out of the last 4 years. And it looks like things will be no different in 2016.

The loss from year to year looks minor – only a few dollars in some paychecks. But that amount adds up year after year. Let’s take an E-1 making $1,546.80 in his monthly base pay this year as an example. He would see an annual raise of $428 if Congress and the President did nothing. Instead, he will see a raise of only $241 next year because Congress and the President want to lower COLA. That is a difference of $187. Like we said, pretty minor.

Using a compound interest calculator, we can figure out that the loss of $187 for one year is a loss of $4,387 over 20 years and that is with a COLA of only 1% every year. If COLA was more, the loss would be even higher.

No one is going to be an E-1 their entire career. That $187 soon turns into a much higher yearly loss with each promotion. At the end of several years, you’ve lost tens of thousands of dollars that could have gone into a savings account, into a new home, or into a college education for your kids.

And it doesn’t end there.

At the end of 20 years, your pension is based on your salary. So that loss of $187 in the first year of your career is going to affect your retirement pay as well.

If you ever needed motivation to call your Representative, this should be it. There is no reason that Congress cannot take up the fight for their constituents who serve in our Armed Forces and include a 2.3% COLA in next year’s NDAA. This is not a raise. This is an adjustment to help your salary keep pace with the rise of inflation. It’s the least that Congress can do.

Angie DrakeAngie is the founder of Not Your Average American where she currently writes about living and traveling in South America. As the daughter of an Air Force NCO and the wife of an Air Force Officer, she has broad experience with military life. She is outspoken about issues that affect the military community and posts opinion pieces at DailyKos and helps run the KeepYourPromise Facebook page with more than 100,000 followers fighting to keep military pay and benefits intact.