Good simulators are just a shade away from a live trading platform with regards to fill accuracy and position tracking in real time. I think that was the point of the first post in this thread. This is quite a step up from paper trading.
As for the psychological aspects, I think too many lump it all in and say that live trading is so much different than simulated trading because of the emotions. The one point I want to make is that the emotions of live trading aren't all just about the risk of money loss. There is also the uncertainty about whether the method you are using is sound, whether you know what the heck you're doing, and whether you have what it takes to make it as a trader. You will note that some of these (many other emotions as well) can be effectively addressed through practice. You can gain confidence in your method/system, you can gain confidence in your ability as a trader, you can gain confidence that you're not just throwing your money away, etc.. And there is a certain level of proficiency that can be developed through simulated trading, and sim trading is a great way to sharpen up your live trading.
But when you've been sim trading and finally go live and the dollars roll down and up in realtime before your eyes, you finally have that confidence tested, and so yes it is a very different level you are working on than the simulated level. But I would have to say that at least for me, simulation has been a great boon in my development as a profitable trader. And after a while of profitable trading, the emotion level goes down to the simulated trading level of emotion (where you are concerned about executing, rather than about losing $$$), and even below it as it starts to get less exciting and more profitable and as the proficiency level rises.
