By Stanley White

TOKYO (Reuters) - A Japanese government panel on Thursday recommended doubling the country's sales tax in stages over the next four years to help pay for rising social security costs, though Prime Minister Naoto Kan's looming resignation and instability in his ruling party cast doubt over whether the policy will be implemented.

The panel also recommended strengthening daycare for children, increasing workers at hospitals and raising the retirement age to adapt a welfare system from the 1960s to Japan's rapidly aging and shrinking population.

The government would have to submit legislation by next year to start increasing the 5 percent sales tax, but there are doubts whether this will happen. Kan said on Thursday he would resign sometime in the future to discourage members of his Democratic Party from supporting a no-confidence motion against his cabinet.

Criticism of Kan's handling of a natural disaster and nuclear meltdowns in March is strong within both ruling and opposition parties and it is unclear if Kan's successor would also support raising taxes.

The plan estimates that Japan needs to cover a net cost increase of about 2.7 trillion yen ($33.4 billion) in the fiscal year to March 2016 for changes to social security, which also include unifying disparate pension systems, encouraging more outpatient care and issuing social security numbers to citizens.

The government should also generate around 1.2 trillion yen in savings by making some social security programs more efficient, the plan said.

Japan's Public debt is already about twice the size of its $5 trillion economy and ratings agencies are threatening to downgrade the country, so containing rising social security costs and the raising of revenues are both needed.

Social security spending accounts for almost a third of the state budget, which totals 92.4 trillion yen for the fiscal year that started in April. As Japanese society grows older that spending rises about 1 trillion yen each year.

If the government did raise the sales tax, it would be the first increase since 1997 when the rate went to 5 percent from 3 percent. Politicians are often reluctant to talk about higher taxes as some economists blame that increase for causing a recession.

($1 = 80.915 Japanese Yen)

(Editing by Joseph Radford)