Who are these people who are illiterate? How many of them are citizens who have attended 12 years of public schooling? I'd be willing to bet the majority are illegal immigrants and children of illegal immigrants. The next largest group would probably be urban black kids to whom learning means acting white.
Then, of course, we do have people with language disabilities. THIS group is the only group which has trouble with the difficulty of the language itself. Such a large change for the population as a whole to accomodate a very small group of people is simply ridiculous.
Actually the rate is just slightly lower in Canada and New Zealand, with far fewer minorities etc. Around 17% at best. And they don't use Whole Word.
You are right that Phonics helps. Whole Word was partly a reaction to the lack of logic in our spelling. Countries with self-consistent spelling would never think of adopting anything so crazy. They learn the shapes and sounds of the letters and thereafter have little trouble, just as we learn the shapes and sounds of the numerals, plus a few rules, and have no trouble counting or reading "2004".
We try to teach the rules, such as "magic e" on the end of a word makes the preceding vowell long, as in "The brave save the cave and then behave." But then the student says "have" must be spelled "hav" because otherwise it would rhyme with "behave", right? And we tell him it is not a misspelling, just an exception (which isn't an answer just a cop-out) and he'll just have to memorize it. And thousands of other words, which is why it takes us two years to learn and others two weeks.
But that is no reason to go totally mad and stop teaching the whole basis of reading! Phonics is good.
That said, our spelling is not good and we adults should fix it and stop blaming kids. They don't blame kids in Norway, because when the system is honest nobody makes mistakes.