The concept of work is still changing, and there is no point in assessing whether this is good or bad. For a long time now, employees have not worked for just one employer on the basis of a long-term employment contract before retiring.
Authors: Natalja Omeltšenko Ministry of Social Affairs, Adviser to the Social Security Department and Katre Pall Estonian Ministry of Social Affairs, Head of Social Security Department. This opinion piece was published in Postimees (in Estonian) on 15 August 2017.
A workplace is no longer simply a specific location where a person stays from nine to five, and working often no longer involves a single employer. The changes in work and working also result in significant changes in the areas closely related to these, including social security.
In Estonia, it is quite common for people to engage in business activities in addition to their traditional paid employment. For example, people become self-employed, establish a private limited company, or do some additional work under a contract. Increasingly more people are becoming self-employed, not only selling their skills in Estonia, but also abroad, wherever they see fit. As new forms of work are becoming increasingly widespread, they are called ‘future work’.
Of these new forms of work, for example, mobile work based on information and communications technology (work that can be done wherever and is performed by using computers or other means of communication), on-demand work via mobile applications or the Internet (such as a Wolt food courier or Uber driver) and short-term work have become prevalent in Estonia. Quite as expected, the most widely spread new forms of work in Estonia include work that requires digital skills and fast mobile Internet connection.
Both employers and employees are interested in taking up these new forms of work, although the actual percentage of users is still small. We can already see that the new forms of work help bring those people who are not content with an employment relationship based on an employment contract with an unspecified term and who prefer more flexibility in hours and locations or a smaller work load, to the labour market.
In addition to flexibility, innovation, and the possibility to become one’s own boss, future work also provides challenges. In the case of the new forms of work, these challenges include ensuring that a working person has social protection and stays in the labour market.
Traditionally, social protection ensures income to a person if various situations, good or bad, – such as social risks – occur, whether these are loss of work, illness, occupational accidents or the loss of capacity to work, childbirth, or eventually old age. All of these situations may cause (temporary) interruptions to working, but thanks to social protection, people receive an income replacement benefit or an allowance to cover costs.
In Estonia, social protection is largely based on labour taxes, primarily social tax. The conventional contractual form of work and being self-employed presuppose the payment of labour taxes, which ensures social guarantees for employees (and in some cases their family members too).
Employers pay social security contributions for their employees; self-employed persons and members of incorporated entities pay social tax themselves from their earnings. In order to obtain pension rights, health insurance or parental benefits, all social tax payments that have been transferred, to what is known as a person’s social tax account, are summed up.
Registering as a self-employed person or establishing a private limited company are two alternatives for persons who sell their skills and provide services to earn a stable income. Those who are registered as self-employed persons pay social tax from their earned profit and are therefore covered by insurance. In order to be covered by insurance, a person who is engaged in a private limited company should pay remuneration to themselves, as well as all the taxes related to this. If the owner of a private limited company pays themselves a low salary to optimise the tax burden and takes the profit out as dividends, they do not ensure (sufficient) pension for themselves for the future.
In the case of the new forms of work, there may not be any social protection at all. People who provide services to each other (Uber taxi drivers, providers of domestic services, etc.) are left outside of the social protection scheme as social tax liability does not accompany random earnings. As social tax is not paid, health insurance, old-age pension, and sickness benefits are not ensured.
Unfortunately, some new forms of work may be equivalent to short-term work or a small workload. If this becomes widespread, it raises the question whether our contribution-based social protection is sustainable, as its by-product would be insufficient contributions to social security schemes.
If increasingly more people declare passive income (dividends) instead of active income (salary), we must decide whether to make social security universal. This means that in the extreme case, the amount of the social security benefit would be the same for everybody, irrespective of the social tax paid, whereas the level of benefits cannot be particularly high.
At present, 99.4% of the Estonian population who have reached retirement age receive old-age pension. In the future, it is possible that 19% of persons of the working age will not have been in employment for 15 years, which is the period required to qualify for a pension. At present, health insurance coverage is around 94%, which means that about 80 000 persons are without health insurance. Therefore, it is important that the new forms of work enable joining social protection schemes, i.e. the payment of social tax, based on which benefits could be received either immediately (e.g. health insurance) or in the future (e.g. pension).
As new forms of work are becoming widespread, countries must consider which reforms are necessary to ensure social protection to future employees. In Estonia, this is done within the framework of developing the simplified taxation act, i.e. what is known as the entrepreneurial income account legislation.
An entrepreneurial income account is an account to which a person can transfer their entrepreneurial income, which shall be taxed with a 20% rate while in the account. However, the person’s social guarantees differ considerably compared to when they only pay income tax with a similar rate. The part paid from the entrepreneurial income will be divided between social tax, including health insurance, contributions to the first and second pillars of pension, and income tax. Thereby, a person’s social guarantees arise or increase.
Using an entrepreneurial income account is an opportunity, not an obligation, placing the responsibility for social guarantees on the future employee.
Therefore, the future of work creates new possibilities, but also makes it necessary to update our social security systems. In order to continue the discussion on the topic of the future of work during Estonia’s Presidency of the Council of the European Union, the Ministry of Social Affairs will be organising an international high-level conference, the ‘Future of Work: Making It e-Easy’, held in Tallinn on 13–14 September. The main goal of the conference is to introduce practical solutions that would make adapting to the future of work considerably easier. The conference brings 400 participants and more than 30 speakers from across the world to Tallinn.