Litaracy should be automatic for PCs, because it's a PITA to have illiterate PCs and most of them forget to play it. Literacy should be rare among the general populace, but, let's face it, in most fantasy games, it isn't, because it's all about notes and maps and secret signs and what-not. This is an area where I'm willing to handwave.
I love complex and realistic language rules, but, in play, they turn out to be an obstacle. In terms of game design, I'd like them to be there so I can use them if I want them. However, they are often poorly implemented, even in good games -- an old Murphy's Rules noted that, in Runequest 3, two people from the same village had a 1-in-3 chance of not being able to understand each other.