Could Estonia be the first to create ‘location-independent social security’ for digital nomads around the world?
Our current tax systems were designed long before the Internet age in which people can now live and work anywhere. Here’s how Estonia could lead the change…
An increasing number of people are living and working across borders with little more than a laptop and an internet connection. These digital nomads may not need a fixed location, but they do still need the kind of social security that a fixed location can provide. We all get sick and we all age, after all. So do digital nomads.
As their numbers grow rapidly, it is clear that our current residence-based tax systems around the world have failed to keep pace with this change. ‘Where do I pay taxes?’ is one of the most commonly repeated questions within digital nomad communities online, along with other questions that Estonia is already helping answer through its offer of e-Residency, such as ‘where do I register my company?’
Many countries would struggle with defining digital nomads as strictly their own residents, because of their extensive travel and weak links between job duties and specific geography. In addition, social security, at least as we know it in Europe, is not a norm everywhere in the world. It may not exist in some countries at all or it may have a completely different setup concerning both the contributions and the benefits. On the other hand, accessible healthcare and old age insurance should objectively be of interest to absolutely all of us.
In order to answer this question, I believe it is only a matter of time until countries move towards offering e-residence based taxation, too. Estonia should seriously consider being the first country to lead this change. We are already a digital nation with an advanced online infrastructure that can be accessed globally.
Crucially for Estonians though, we are also one of many countries that have serious challenges to address inside our borders due to demographic changes. As a result, it would equally be in the interests of Estonians to develop our social security system in a way that enables more people to contribute.
For quite some time, we had a ratio of 2-to-1 between contributors and beneficiaries at any one time. In other words, at least two employees to one pensioner. At a pension tax rate of 20% (disregarding the disbursements into mandatory funded pensions), this produced an average old-age pension at the level of an established pension standard, i.e. 40% of the country’s average wage. Due to demography, this is now doomed to stay in the past, because mass immigration, which could improve or at least keep up the standard, is in no case our political reality. It is also unlikely that we will see a surge in natural population growth through birthrates above replacement levels.
We need an answer to this demographic decline, because it is exactly the reason why we question sustainability of our conventional social security systems. At the same time, we see that digitalization in our economy allows for unparalleled flexibility in what is the very nature of working. Millions of employees around the world can decide for themselves how, where, and when they perform their job duties. What if the pace at which digital economy and workforce mobility develop today, allows us to imagine that in future joining a social security system and financing it may cease to become an obligation and instead turn into a service, most likely a location-independent one?
Assessments vary currently how many remote workers or digital nomads there are in the world. I should do a better job of saving links and references, but somewhere in the attic of my memory there is this number — it is 1% of the global workforce in 2015 — which was 30–40 million people in that year. There are all the reasons in the world to believe that the number has since grown. When I compare it with this assessment claiming that, in the most developed countries alone, the digital nomad population is around 99 million, then — assuming most such nomads come from developed countries — the resulting ratio of nomads to world’s labor force is roughly 3%. And according to this source here from 2018, approximately 4.8 million in the US identified themselves as digital nomads, which is actually more or less 3% of the US total labor force. Regardless of the precise number, what is important is that we are talking about at least tens of millions of people in the world! Somewhere between one and three percent seems to be a safe assumption.
In our little Estonia, the employed account for approximately 600–700 thousand people and so the world’s digital nomads are at least a one hundred times bigger crowd than this. These are the people who work while they travel (or, if you prefer, travel while they work), because the nature of their job does not link them permanently to any geographic location. Yet, most countries tax natural persons based on the concept of tax residence. This residence is derived from concrete places where people live or spend most of their time and / or where people have the center of their personal, social, and economic interests.
I am sure someone in the world will soon be the first to offer digital nomads a voluntary social security that would mean both medical and old age insurance. Why can’t it be Estonia? If only 1% of the world’s digital nomadic population signed up to this location-independent social security, we could double the number of current contributors from 0.6–0.7 million to well over a million. The potential clientele is attractive — digital nomads are chiefly in their younger years and obviously in good health that allows for frequent travel.
One study on digital nomads claims that it is an extremely mobile bunch of whom 32% travels to 5–10 countries each year with another almost one-third (29%) travelling to 3–5 countries. Worth noting, nearly 60% of digital nomads stay in one place for no more than four weeks. The rest of them do not stay put for more than three months. No wonder that we have, in addition to theoretic difficulties, quite serious practical problems to define where these people can be considered residents and where they should pay their taxes.
It is also somewhat surprising that digital nomads are not particularly rich. Approximately a third of them earns between 900–1800 euros and another 20% earns up to 2700 euros. At the same time, this warrants our hope that the levels of income equal to those of our own specialists can mean similarities in other aspects as well, for instance in spending levels and in costs of social security, including medical services.
The frequent travelling and the absence of tight economic and personal links to any specific country or tax jurisdiction means that most countries cannot seriously consider digital nomads as own income tax residents or taxpayers either theoretically or practically. Therefore, it is even less realistic that they must pay their social security contributions simultaneously to all places where they are present during the year. In this era of unbelievable workforce mobility, any country’s attempts to constantly track down all of their existing or potential residents are most probably doomed to fail. So the challenges for our existing residence-based tax systems are there and they’re no joke. Let’s not forget, most digital nomads operate in this new jurisdiction called the Internet, which has no ministry of finance, tax administration, nor social security fund of its own.
Everyone is into social security
In jurisdictions and activities linked to geography, taxation is almost exclusively obligatory. With certain caveats, the same holds for old age and medical insurance. However, for digital nomads, this insurance can often be a matter of voluntarily subscription to these services. If we look at where the job market is moving nowadays and what will potentially happen down the road to mobility of people, we can boldly assume that the service-like nature of social security as a whole is bound to be a very probable development.
This opens up huge potential for our country to be the first of its kind and offer a location-independent social security. Whichever way we look at the future job market and the people there, irrespective of how, where, and when a person works, objectively he or she must be interested in medical and pension insurance. As already said above, getting sick and aging happens to all of us.
What would this insurance look like and what would it entail? First, we must agree that whatever we do as a country, it has to be actuarially sound. In other words, there must be no cross-subsidies with other state revenues and the costs and payments from this new system must not exceed its revenues. On the other hand, we might plan as an objective to gain some, so that there could be an immediate benefit to our own people and to our pension and medical insurance budgets.
Upon paying the social security contributions to Estonia, digital nomads would be entitled to medical insurance and, in the future, also to pension insurance, provided they have paid the premium long enough. For us, the settled residents in Estonia, the right to an old age pension arises after at least 15 years of tax payment history and so the same could be offered to others. Of course, for medical insurance the earning period will be different, but in order to prevent abuse it will have to be longer than the usual waiting period of 14 days (between taking up employment or starting entrepreneurship and becoming medically insured).
The question of what could be the amount of a regular contribution is understandably up for full-fledged financial analysis. Still, it is clear that when the pool of payers and insured people is no longer limited only to our residents, then supporting the ratio of 2-to-1 or upping it to 3-to-1 will be easier and will contribute to the improving our social security sustainability.
State systems have their benefits
The beauty of state pension insurances is in the principle that we know under the name of pay-as-you-go (PAYG). This allows financing of current liabilities out of current payments through creation of solidarity systems, which is different from financing own future liabilities out of own current savings. At the same time, PAYG requires that in future there are a sufficient number of payers in the system. Taking into consideration the world’s current digital nomadic trends, this looks very probable.
It is also possible to design a system where half of digital nomads’ payments go to PAYG system and the other half are saved for future pension payments. This combination of PAYG and savings requires proper analysis, too. Certainly, we would compete here to some degree with investment companies and voluntary pension funds that already exist. But in a free world it must be up to the digital nomad to decide whether to trust a government solution of an EU member state with a stable legal system or privately held companies and funds.
For those who purchase this location-independent insurance, its medical part would offer the same healthcare services available through the Estonian Health Fund. Understandably, sickness leave compensation would not be on the list, because its use would be completely impossible to monitor for people who are not present in Estonia (for financial compensation, there is a requirement to follow the treatment regime prescribed by a person’s medic). For the time when the insured persons travel outside Estonia, we could offer them medical travel insurance, in cooperation with private sector, and this will guarantee that all acute illness cases are well covered.
Currently, long-term travel insurance plans offered by our major insurance companies and banks have a reasonable price of 50–70 euro per year. This price can be even lower if bought in bulk by the state for its pool of insured digital nomads. Possible extensions of the medical insurance could include hospitals in a form of a “medical embassy” in, say, Singapore, São Paolo, and Cape Town where the treatment would be covered by the Estonian Health Fund and where an insured person could go to without having to travel all the way to Estonia.
Here, we would also have to compete with private insurers, but understandably a state-offered medical insurance has a lot more to offer — for instance, in case of some critical illnesses, private insurance coverage is usually capped, whereas the state-offered insurance isn’t.
The goal of the location-independent social security is to broaden our economy and the social security budget by being apparently the first in the world to satisfy the demand for comprehensive social security as a service, not as an obligation. This system will allow our economy and our country to grow without the need to be afraid of mass migration, which is a major concern for many people.
This article expresses the author’s personal views, however the E-residency 2.0 white paper lists this idea as a future feature for our e-residents. Many thanks to Adam Rang for his editing help.
