If the rust is on the braking surface, leave it. It'll help with braking. And is a better deterrent for thieves.

If you can find some, get a set of salmon colored Koolstop brake pads. That's the only "upgrade" I'd recommend.

If you ever see a abandoned bike with reasonably true aluminum wheels, take at least the front wheel. The front wheel is most critical for braking, and as mentioned, Al brakes better when wet. Replacing the 5-speed rear wheel might create more headaches than it's worth.

FWIW, I've come across a few modern cheapos using V brakes and painted steel rims. They work surprisingly well even when wet. Not classy by any means, but common at places like walmart. I even saw disk brakes there a few days ago!