A Heritage Foundation report, distributed at a Cabinet meeting last week, proposes to exempt interest on savings from taxes and to allow workers to withdraw gradually from the Social Security and Medicare systems and finance their benefits through Individual Retirement Accounts.
The report also recommends charging patients more for Medicare hospital stays, cutting by 3 percent projected Medicaid grants to states with "excessive" health care costs, substantially shrinking the functions of the Department of Education and linking student aid to academic prowess.
The report, called "Mandate for Leadership II," is to be published Dec. 7 by Heritage, a leading conservative think tank headed by Edwin J. Feulner Jr. that has a strong following among administration officials.
Four years ago, Heritage published a similar report outlining more than 2,000 proposals. That became the first glimpse for many of the conservative themes and proposals that characterized President Reagan's first term -- reducing the scope of government, shrinking federal programs and relying more on market forces to solve economic problems.
Feulner, in a foreword to the new report, said nearly two-thirds of the proposals in the 1980 report "had been or were being transformed into policy" by the end of Reagan's first year.
Advance copies of the current report were given to White House counselor Edwin Meese III. At a Cabinet meeting on Thursday, each Cabinet member was given the portion of the report that related to that member's department.
Portions of the report also were leaked to the press over the weekend.
The New York Times yesterday reported the Medicaid proposals and quoted one source as saying the documents were "favorably received."
However, a White House source and a top aide in one department said Cabinet officers simply were given the document and asked to look at it.
The new report contains more than 1,300 foreign and domestic recommendations, including:
*Consolidating most education aid programs into block grants to the states and eliminating the Department of Education's civil rights enforcement responsibilities.
*Giving government vouchers to recipients of Medicaid, Medicare, education and housing aid, allowing them to buy private services or benefits. The value of the Medicaid vouchers would vary according to the income of the recipient.
*Increasing highway and waterway tolls, imposing heavy fees on corporate jets that land at busy airports during rush hours, ending further federal work on the interstate highway system and leaving it to the states to impose gasoline taxes to pay for highway construction.
*Opening more government offshore oil areas to private development.
*Including in all Medicare coverage a limit on how much individuals must pay for catastrophic illnesses. Eventually, as more people choose to put their money into medical IRAs to cover retirement medical needs, the report said, the catastrophic protection might remain as the only Medicare option.
*Providing a block grant to states to cover outlays for nursing home care and home health care, now separately financed through Medicare, Medicaid and other programs.
*Further "deregulating financial institutions to speed the flow of capital into business," and excluding savings interest from income tax to "encourage capital formation."
*Making more use of private firms to provide commercial services to the government, redesigning programs to "foster private-sector transportation and municipal services."
Calling the creation of the Department of Education "a historic blunder," the report said that the department should now be shriveled into the equivalent of "a three-room schoolhouse."
One of the three sections should distribute to the states a federal block grant for elementary and secondary education, and should "wholesale" student aid money to colleges, allowing them to "retail" it to needy students. A second section would be a "small but outstanding statistical bureau," and the third, a "bully pulpit" without regulatory authority, to propound "sound ideas" to improve schools.
Both the medical and Social Security sections proposed that workers be permitted to invest a portion of their Social Security taxes in private, tax-free IRAs that would pay for pension and medical benefits on retirement.
Eventually, the law would permit workers to put their entire Social Security tax into the IRA.