I'm not sure how it can wear out from age, unless it's something to do with the plastic.

A resistive touchscreen is actually two transparent plastic layers coated with an electrically conductive but resistive substance, held apart by very tiny bumps.  If you hold up the display exactly right, you can actually see the little grid of bumps.  When you press the screen, you're making the two layers contact each other, and the electronics measure the electrical resistance from the edges of the screen to the place where the layers touch.

You should be able to set the touchscreen to reasonable settings with a "debugchumby" script:

#!/bin/sh
echo 165,3835,3947,-3597,0 > /psp/ts_hid_settings

These are the settings for my C1 - they should be close enough to work for you.

If that works, there's a way to restore the "special options" mode from the main mode - you need to set up a dongle just like you're doing a firmware update, insert it into the device, then navigate to the hidden "pi" screen (settings->chumby info->pi), at which point a button should show up on the right side under the "clear cache" button.  I *think* you might have to unpack the zip file for this to work.

If the recalibration does not work, then it means something's gone wrong - my guess is that the microSD card is wearing out and the device is having trouble storing the settings.  You'd have to open it up and refresh or replace it.

Note also that you should be able to plug in a USB keyboard and get a console on the device, if you're inclined to use the command line to fix stuff.