Political Correctness dictates that children?s' feeling never get hurt.
Of course children would feel bad and would be teased if they were segregated into a classroom for "underperformers". That wouldn't be fair to have a "smart" kids class and a "challenged" kids class. So, for the time being, we continue to teach towards the lowest common denominator.
Not that I advocate the German system either: After the 4th grade, teachers decide whether kids go to the Gymnasium, Realschule, or Hauptschule. The former is for the smart kids, preparing them for university, and the latter two schools prepare kids for apprenticeships and more blue-collar-type jobs. Switching between the schools can be difficult, so basically your lot in life is determined at a (much too) young age. But it does indeed keep students segregated by academic lines...and incidentally...often by racial/socioeconomic lines as well. And it is for that reason that Germany is looking at more of an American style education system as a possibilty.