Study here: http://nces.ed.gov/NAAL/PDF/2006470.PDF

There are a couple example questions in that, but if you want to understand the full methodology you'd have to read this:

http://books.nap.edu/catalog.php?record_id=11267

Basically the situation is that:

According to the National Adult Assessment of Literacy (NAAL), the largest and most authoritative survey of adult literacy in America, only 13% of adults are able to read English at a 'proficient' level. This means that 87% of American adults lack the minimum level of literacy skill necessary to complete simple tasks like comparing the viewpoints in two editorials or computing the cost per ounce of food items. In other words, the overwhelming majority of Americans lack the minimimum amount of education required to participate in the knowledge economy or to contribute anything meaningful to the democratic process. Source: Table 1 on p. 3, Figure 2 on p. 4.
Adults unable to read prose at a 'proficient' level, by race/ethnicity: White - 83%, Asian/Pacific Islander - 88%, Hispanic - 96%, Black - 98%.

Adults unable to read prose at a 'proficient' level, by educational attainment: High school graduates - 96%, College graduates - 69%, Graduate studies/degrees - 59%. In other words, the majority of graduate students are incapable of fully understanding a newspaper, let alone an academic journal article. And virtually all high school graduates are functionally illiterate. (And again, being 'proficient' does not mean being able to read academic journal articles, which is sort of the minimum requirement for being an independent thinker in society. In fact at least 2 / 3rds of those who score 'proficient' still do not possess this more advanced measure of literacy.)

John Taylor Gatto also gives his analysis of the situation here based on the 1992 data. (The data I cited was 2003)

http://www.johntaylorgatto.com/chapters/3b.htm

http://www.johntaylorgatto.com/chapters/3j.htm

Gatto throws in a couple weasel words, and I think sometimes his analysis is a bit reaching, but overall it seems to be generally accurate. Even if you don't fully buy into the idea of an enormous decline over the last 100 years, the current methodology of the National Adult Literacy Survey seems pretty solid. (That's currently the gold standard for literacy estimates in the US.)

But what about the CIA World Factbook, which estimates that the United States has a 97% literacy rate as of 2002? Where do these figures come from? To quote from Jonathan Kozol's book Illiterate in America, "For one hundred years, starting in 1840, the census posed the question of the population's literacy level in its ten-year compilations. The government removed this question from its survey in the 1940 census. The reason, according to a U.S. Census Bureau publication, was a general conviction that 'most people [by this time] could read and write ...'

In 1970, pressured by the military, the Bureau of the Census agreed to reinstate the literacy question. Even then, instead of posing questions about actual skills, the census simply asked adults how many years of school they had attended. More than 5 percent of those the census reached replied that they had had less than a fifth grade education. For no known reason, the government assumed that four fifths of these people probably could read and, on this dangerous assumption, it was publicly announced that 99 percent of all American adults could read and write. These are the figures which the U.S. government passed on to the United Nations for the purposes of worldwide compilations and comparisons." You can read the rest of chapter 5 here, which further explains the methodology and how the CIA figures are propaganda rather than science:

http://eserver.org/courses/spring97/76100o/readings/kozol.ht...