Here's an interesting discussion on the age-old problems of generational differences, educational hand-wringing, literacy and peanut butter (peanut butter gets mentioned in the comments :) ).
Two points struck me as particularly relevant:
1. Every older generation thinks the upcoming generation is: "declining, less well-educated, sloppier, etc." than their own generation was. What's relevant about this point (for me) is that the decline is in the eyes of the older generation, not in the performance of the younger generation. It's a bias of viewpoint. Sociologists even have a name for this tendency to view the present as not living up to the glories of the past - "pessimistic bias".
2. There's a significant difference between the purpose of literacy - which I think is "the ability to communicate and understand" - and the formal teaching and assessment of Literacy. What I find relevant about this is the time lag between media fluency and educational assessments. We educators focus on measuring students' skills in using traditional media, and ignore their skills in using new media.