photo-realism can be achieved today, I'd post a link, but it's not safe for work, just look on CGTALK.com, it's just that the photo you're trying to realize has to be relatively low quality.
Animation on the other hand, is much more difficult, largely because our movements, simple as they may be, affect our entire body as a chain reaction sets off. While we sit here typing, we're breathing, our nostrils open slightly more, slightly less, slightly more, and our chest rises and falls. The muscles in our arms move, just tiny amounts as a result, as do our legs, but animating all these tiny details realistically is an animator's worst nightmare, every frame changing many many variables, increasing in speed and complexity as the action of the scene rises, virtually any 5 minute sequence with characters in combat would take months. High resolution models and textures are close, but always off, because when you see the skin of a person, you're looking at pores, hairs, veins, blood vessels, dermis, abrasions, wrinkles from motion and most of these things move or change in response to the environment. And when you look into someone's eyes, you're looking at a transparent membrane over another membrane with an iris made of muscle fibers in the center. Flat textures can't emulate these minute details well enough to create an HD illusion, we must make strides in modeling and rendering technology, which will take 5-10 years, maybe less if we can get a unified curved geometry format going.
In the matrix argument, I'm mixed, I believe control on such a level is wrong for anything short of an all knowing benevolent being such as God, but as far as the simulation goes, if it tastes like steak, if it feels like stake, and it smells like stake, and doesn't kill you, then it's for all intents and purposes steak.
Imagine if the world we lived in was a mix of virtual mental projections and real life objects, imagine skinny people walking out of McDonalds on a regular basis, having just consumed a nutritious vitamin gel compound shaped like a burger, made to look and taste like one by the virtual mind projections. It has a darker side, yes, which is why I believe the system should have an off switch, which you can always reach, both in reality and in your mind, and at least a month of the year should be spent without it at all.