I agree with everything that you say - except perhaps the last part since really I doubt that a discontinuation of the ability to earn legendary rank would solve any meaningful problems, without creating new ones (for members who would not be able to rank up to legendary).
My proposal is to eliminate the privileges for "Legendaries" - i.e. to give "Heroes" already the maximal possible forum functionality including all signature options, with the exception, obviously, of typical staff functions (ban users, delete posts etc.).
I think it's simply not necessary to require 1000 merit points to be able to use all forum functions. 500 - the "Hero" threshold - is enough in my humble opinion, it should be achievable in 2 years approximately, or much less if you're a really good poster.
The reason is that I think that current newbies
do have a point when they complain that 1000 merits is a very difficult figure to achieve, and it was much easier before when it was purely activity-based.
"Legendary", or even a superior rank with 2000 merit points, as you suggested, could be kept as a "honour badge" but not as a rank required to use any functionality of the forum. I think if you made it to the "Hero" rank via the Merit requirement, you already demonstrated that you're really contributing valious contents to the forum, so it's not necessary to add an incentive to reach 1000 or 2000.
(I was waiting for KingZee to respond to my [positive] evaluation of his proposed alternative merit system, but he seems not to be interested in discussing it here anymore. A pity.)
Your further explanation above causes me to wonder exactly what are the "forum privileges" that allegedly currently exist for Legendary members that do not currently exist for Hero members?
I was not aware that there were any privileges for Legendary members (as compared to Hero members) beyond symbolic - meaning the rank title itself.