I agree that cutting the affected portion of the mast, reinstalling the mast step insert and having a riser for the mast step fabricated and installed would be a good solution.
You might also want to attempt to determine the cause of this destructive corrosion and solve it before it happens later on down the road. Maybe you could do a hard powder coat to the insert and step to insulate them. Maybe also drill small drain holes at the base of the mast (I imagine water has pooled up on top of the step insert to accelerate this corrosion). If the component that is corroding is the step insert (instead of the mast itself) you could have a new one fabricated of a superior material.
I agree with all that the mast should be cut short and saved. The mast step and all involved components appear to be of dissimilar metals and also not very corrosion resistant. You might seek the advice of a local engineer or machinist on a better solution to the materials.
1981 C&C 32