DOD Implements New Overseas Cost-of-Living Allowance Adjustment Process

by Joseph Clark, DOD News, May 3, 2023  

The Defense Department has announced updates to the adjustment process for the overseas cost-of-living allowance, which is aimed at creating financial predictability for service members stationed outside of the continental U.S.  

Under the policy announced yesterday, reductions in OCOLA resulting from changes in cost-of-living and currency fluctuations will be implemented no more than once every six months, effective May 15 and Nov. 15. 

The new policy also stipulates that approved OCOLA reductions based on annual cost-of-living assessments will be split between the two, six-month cycles. Reductions based on currency fluctuations will be implemented in full each cycle.  

The department will continue to implement OCOLA increases continuously throughout the year when warranted. 

The updated policy aligns with changes mandated by Congress in the National Defense Authorization Act for Fiscal Year 2023. 

OCOLA is a nontaxable allowance that varies based on a service member's duty location, pay grade, time in service and number of dependents.  

The rates are calculated based upon a living pattern survey, which measures where members shop – including the proportion of shopping performed on military installations, at local community outlets and online – and retail price surveys, which measure the cost of non-housing goods and services in the locations where members shop.  

The rates for foreign locations also account for currency fluctuations. 

In December, the department implemented a 90-day pause in OCOLA reductions to provide temporary relief to those subject to OCOLA reductions due to higher inflation in the continental U.S. as opposed to many overseas locations, as well as a strengthening U.S. dollar.  

Reductions will resume later this month under the new adjustment process. Service members in affected locations will see reductions their OCOLA reflected in their paychecks beginning on June 1.   

"Many of the locations that we will see initially will be in areas such as Hawaii, Guam, Japan and other locations in the [U.S. Indo-Pacific Command] theater, although we are seeing some fluctuations as well in other locations in Europe and Australia due to either the price surveys or due to currency and exchange rate changes," a senior department official said.  

While previewing the updated policy, officials emphasized that even those affected by OCOLA reductions are unlikely to see a reduction to their overall pay when compared to last year.  

"It's important to acknowledge that in January, service members received a 4.6% increase in basic pay, as well as an approximately 11.2% increase in basic allowance for subsistence," a senior official said. "And even those locations where COLA rates will start to decline, pay in 2023 is still higher than it was in 2022, so many service members will still have a higher take-home pay even with OCOLA reductions than they received in 2022." 

Under the updated policy, officials will notify combatant commanders 30 days prior to implementing reductions to ensure service members are prepared. Combatant commanders will be given an opportunity to submit an appeal within 45 days of the announcement to request a review of OCOLA reductions affecting duty locations under their command.  

The country allowance coordinators for locations affected by the May 15 reductions were notified prior to March. 

Further information about the OCOLA program is available at: "Overseas-Cost-of-Living-Allowance"