Shin Okada
Explorer
"Level", not "spell level". It refers to the class level, IMHO, and makes sure you do not "regain" the two spells you give up on the next level up, since the first sentence only refers to the 5th class level. Basically you lower the spells known for 1st and 2nd spell level for the 5th class level and each subsequent class level.
But if you read it as "class level" instead of "spell level", now that may cause even much serious damage to a single-classed sorcerer.
Each time you level up, you learn 1 or more new spells. Now that number decreases by 1. So, if you take that class feature at 5th-level, you will learn 17 less spells in total by level 20, comparing to normal Sorcerer.
On the other hand, you can easily avoid most of the disadvantages from this alternative class feature by multi-classing into appropriate prestige classes. Because you can easily avoid gaining additional sorcerer class level again.
So I vote for "1 less spells known per spell level".