If you're a Social Security recipient, you probably already know the good news.

Social Security checks are about to jump faster than they have in 40 years. That's because Social Security benefits are raised each year according the cost-of-living adjustment (COLA), which is based on a version of the consumer price index (CPI-W), measured from the third quarter of one year to the third quarter of the next.

For 2022, the Social Security COLA, or increase, was 5.9%, but it's on track to be around 9% in 2023 based on recent inflation readings. As of July, the CPI-W was up 9.1% on a year-over-year basis so the 2023 COLA is likely give a significant boost for most retirees.

But there's bad news, too. Retiree expenses are also increasing faster than they have in 40 years. As measured by the Bureau of Labor Statistics' Consumer Price Index, prices for essentials like food, gas, and utilities are all up substantially over the last year. Food prices have risen 10.9%, gas has jumped a whopping 44%, and utility prices are up 19%.

A typical retiree budget

Retiree spending patterns are different than those of working-age Americans. Budgets are smaller as income shrinks and children grow up and move out. According to a recent consumer expenditure survey from the Bureau of Labor Statistics, the average retiree household spends $50,220 annually, compared to the average across all U.S. households of $63,036.

The five biggest expenses retirees typically face are housing, transportation, healthcare, food, and utilities. As a percentage of their household budget, retirees spend more on housing than working-age Americans, allocating 35% of their monthly budget to housing, compared to 33% for all U.S. households. While the housing boom during the pandemic may be good for retirees who own their own homes, rising housing costs could be a challenge for seniors who rent, especially in parts of the country where rents are rising by double digits.

Not surprisingly, retirees also spend more than working-age Americans on healthcare, at $6,833 a year, compared to $5,193 for all American households. Even though seniors rely on Medicare for most healthcare expenses, you still may have to pay copays, costs for procedures that aren't covered like dental work, or may want a supplemental plan like Medicare Advantage.

According to the CPI, costs for medical services have risen 5.1% over the last year. But with labor shortages rampant across the healthcare industry, it wouldn't be surprising to see more inflation in healthcare in the near future as medical facilities have to boost pay to attract and retain workers.

Retirees also spend more of their budget on food and utilities than working-age Americans. Food expenditures are only slightly higher as retirees on average spend 40% of their budget on eating out, taking advantage of the social opportunity to dine out now that they have ample free time. As for utilities, retiree households spend nearly as much as the average U.S. household as you still have virtually the same need for electricity, heating, and cooling in retirement as you do in your working years. On average, retirees spend $3,810 per year compared to $4,055 for all households, which means the spike in electric, gas, and heating oil bills have hit older Americans especially hard.

Why the COLA increase may not be enough

With costs for things like food, utilities, gasoline, and housing in some parts of the country rising by double digits, even a 9% cost-of-living adjustment isn't going to be enough to cover those additional expenses. What's worse is that seniors won't get the Social Security COLA until January, even though they've been facing higher prices for the last year. 

September is the key CPI report to watch, as that will determine how big the COLA will be. From that point on, retirees will be hoping for inflation to rapidly cool so that they won't face the same problem next year. The good news there is that some costs, like gasoline, are already starting to fall, and Federal Reserve Chair Jerome Powell has promised to raise interest rates to bring inflation to heel, which could also benefit retirees who count on savings accounts or bonds to supplement their retirement income.

The upcoming COLA increase will still be welcome to the more than 64 million Americans who count on Social Security, but given the impact of inflation over the last year, it's not the windfall it might seem.