That does look like mechanical wear, not the sort of "erosion" you might get if there was something electically wrong. It is a little tough to tell without having the part in my hand though. If it were electical I'd say to check that the coil is running through the resistor and not running full 12v all the time the motor is running. (assuming its a points setup, see below)
The shaft should have very little wiggle side to side. If you can move it enough to see, then it is probably too much. I've never had one wear out quite that much or that way, but I did have one develop slop in the up and down direction. You could pull the shaft up 1/4 of an inch. It still ran fine and didn't create any cap wear like what you have.
That cap looks like its from an electronic ignition distributor. Did you do the upgrade on it? I can never remember who has exactly what around here.
The giveaway is the hold down you can see in the upper left on the cap in your pic. Points distributors have clips that hook into a groove on the side, electronic dists have that round screw type deal. If you have points and that cap, that might be part of the problem.
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