There is more to literacy than being able to literally say the words that are represented by the letters on the page.

Your argument here, funnily enough, is an example of the exact kind of literacy decline as stated in the OP article.

> Allusions are gone; metaphor is treated literally, often provoking dim-witted outrage.

No, professors are not claiming that college students are literally incapable of sounding out words.

They are saying that students are not able to keep attention on large bodies of text, to follow arguments, understand authorial intent, describe themes, identify rhetorical techniques, or intuit metaphors (such as this very use of reading as synecdoche/metaphor for this whole class of literacy skills which is so obvious that it feels absurd to even have to explain it)

An 8-year-old may be able to read as proven by their ability to answer basic plot questions about a Magic Treehouse book, that doesn't mean they are able to read for the purposes of a university course of any type.

And no, we do not need to guess at literacy performance of people of the past, we have the curricula, we have the books, we have the essays and exams. There is no "guessing at the performance of imaginary elites from the past", we can use the same texts and the same tests. That's one of the neat things about reading, you don't have to guess what happened in the past, you can just read it.