So there is absolutely nothing wrong in decline. It's mathematically necessary. (Well, stagnation, or slow increase is also possible.)
I also don't think that the only function of the education system is to score higher and higher on tests, it has so many other functions: keep kids happy, turn kids into happy adults, lower the tensions is society, create a better world for everyone, etc.
There wouldn't be much point of scoring better in tests if it resulted in unhappy kids, unhappy adults, broken society, broken world, now would it?
Even today, most talking about literacy rates are using a very high level read skills to make things look bad, when most people can read just fine for the normal level things are written in. I'm near illiterate if you only test me on medical papers.
TLDR: fewer people may have been literate, but the ones who were, were damned good writers.