As you suspected, the problem was indeed "elsewhere".
Somehow my product id for Windows 7 was changed a few weeks ago. (Don't ask me how. Virus? Windows 7 came pre-installed with the Dell computer almost 3 years ago. Never a problem.)
While the Action Center still showed I was running Windows 7, Microsoft no longer recognized the product id. This led to the failure in VSS and an occasional popup "not genuine" error message (pic attached). Everything else worked fine.
Solution --
A higher level Msft Techie (3rd rep) took me through installation of a Windows 7 Repair (re-install without losing programs or files). Didn't think that was possible, but it worked. Don't know where the tool came from. After re-install, I was able to enter the correct product id. Result -- no more "not genuine" nor VSS errors.
A painful process of searching for solutions. At least I found your awesome site. I've already recommended it to a few self-employed Windows-challenged folks like me.