[[WMG: The series is a prequel to TheTimeMachine.]]
The humans are evolving into Eloi, as evidenced by their lack of intelligence and inability to care for themselves. The fairies, who still have access to the super-technology of the past, are basically adorable Morlocks. At the moment, the humans use the fairies' taste for candy to keep them docile, but eventually the candy will run out, and the fairies will start to develop a taste for human flesh....
[[WMG: The Fairies are DreamPeople that represent humanity's own PsychicPowers.]]
[[HumansArePsychicInTheFuture Something causes humans to gain godlike powers]] but they can only manifest them where under the right circumstances (the absence of electromagnetic waves and with certain amounts of brain activity) and usually in the form fairies. Thus why Pion couldn't see them, is because fairies operate on a level only a human can interact with and they constantly try to help humans with their desires because they are instruments of humanity's will when focused on their desires or needs something.
[[WMG: The declining population could have been easily solved]]
It's just that no one knew about the birds and the bees.
[[WMG: The series is a sequel to VisualNovel/CrossChannel.]]
They are by the same writer. While whatever was causing humanity to decline caused a town like Taichi's to completely disappear, larger cities like the one we see here only had their populations severely cut. Possibly tying in with the psychic Fairies WMG above, as Nanaka could be seen as a prototypical version of one.