COLA Component Of Salary | 3 Demerits

      3 Disadvantages Of Receiving Cost-Of-Living-Allowance (COLA)

      COLA simply means the Cost of Living Allowance in Ghana. It also means Cost of Living Adjustment in other countries.

      The Cost of Living Allowance is normally paid to cushion workers who are suffering from sudden economic hardships. It could also be paid by governments instead of increasing the basic salary of workers. The preference by governments to pay cost of living allowances instead of increasing basic salaries is due to three main benefits governments gain, which is a disadvantage to the worker.

      Disadvantages of cost of living allowance

      1. Evasion of pension payments: The first and foremost disadvantage of Cost of Living Allowance payment is that the workers do not get pension payments from the government on the COLA. COLA is an allowance which is not included in basic salary. Pension payments are only made on basic salary and not allowances. The worker therefore losses an enhanced pension for receiving COLA

      2. Taxation purposes: Since no part of the COLA is contributed to pension, which is non-taxable, all of the allowance is taxed totally. Complete taxing of the allowance enables the government to take back a chunk of the allowance it pays. It must, however, be stated that the previous COLA paid in the year 2014 was not taxed, unlike the current payments.

      See also: COLA For 2023 Announced

      3. Freeze on loans: the cost of living allowance, which has a definite timeline, is not usually factored into loan affordability calculations. This action indirectly denies workers the needed affordability to access more loans. The indirect freeze on loans means inflation could be tackled a bit.

      The cost of living allowance was first introduced in the year 2014 by the government instead of increasing the base pay of salaries. The percentage of the COLA payment, which was almost the same as percentage salary increment in previous years and even subsequently, suggest the purpose of paying that COLA was to achieve the three (3) main merits of paying cost of living allowance as illustrated above.

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