The most popular answer to this question is that the decline is totally the result of Vatican II. But I reject that answer. If Vatican II played a role in the decline, it was only a very small role. The important factors are to be found elsewhere. There may be a hundred of these factors, but one might be more prevalent than the others.
Christianity is a salvation religion, and it offers to save us from is sin. According to the Christian story, God became incarnate in Jesus Christ, and then suffered and died on the cross, to save us from our sins. The premise upon which all this is grounded is, of course, that we humans are sinners -- very serious sinners.
However, what if we are not sinners? Then it would follow that we don’t need salvation from sin. And if we are sinners but don’t feel that we are sinners, then we won’t feel the need of salvation. So Christianity will make no sense to us.
By and large we modern men and women do not feel that we are sinners, at least not in any serious sense. Oh, we admit that we are not perfect. Any one of us can draw up a list of our imperfections: we sometimes eat or drink a little too much; we often exercise too little; we don’t read enough good books; we commit little acts of impoliteness from time to time; and so on. But no really big sins -- certainly no sins that are great enough for the Creator and Sustainer of the universe to become man and suffer and die in order to atone for our great wickedness.
We admit that some humans truly are very wicked -- Hitler, Stalin, Osama bin Laden, Charles Manson, and a few others. But they are very untypical of humanity. The rest of us, normal human beings, are utterly horrified by the crimes of Hitler and company. This is proof -- isn’t it? -- that we ourselves are not very wicked. So we don’t need salvation from sin. And we don’t need a religion that offers this salvation. No wonder Catholicism is in decline.
There was a time, centuries ago, when people in the world of Christendom (the world that we today call the “Western world” -- for we can no longer with any accuracy call it the Christian world) had a strong sense of their sinfulness, and thus a strong sense that they needed to be saved from their sins. In that atmosphere Catholicism flourished.
Even when the great Protestant Reformation came along (better called, perhaps, the Protestant Revolution), this strong sense of sin persisted. The leading early Protestants, e.g., Luther and Calvin, had as strong a sense of human sin as did any Catholic -- maybe an even stronger sense.
But things changed in the 18th century. The idea that human nature is inclined to evil was gradually replaced by the opposite idea that human nature is inclined to good. The thinker who expressed this idea better than anybody else was Jean-Jacques Rousseau, often called “the father of Romanticism.” But if Rousseau was a powerful influence on 18th century thought and feeling (and he certainly was), this is because he expressed in persuasive words what everybody -- or at least vast numbers of people -- were already on the verge of thinking and feeling.
This substitution of the modern idea of human goodness for the Catholic idea of Original Sin has had, it must be admitted, some very important good consequences. For one thing, it facilitated the coming of democracy; for if humans are good, then we can trust them to govern themselves. For another, it has given us great confidence in our own creative powers, leading to tremendous economic and technological progress. But, and this also has to be admitted, undermined the raison d’etre of Catholicism.