If only they would look at themselves and see, the charade and disconnection, the fantasy they live, the concessions made

I can so relate to this, as it reminds me of someone very close to me...
But they don't see the fantasy, because I believe, at some point, the fantasy becomes to interwoven with their sense of reality and to realize they're living a lie would crush them. Honestly, I think this is a sign of great weakness on someone's part.
A lack of development is exactly the problem, I agree. If they were well-developed emotionally, they wouldn't live in this dream state and would understand that the people who tell them the unpleasant truths do it for their benefit.

Who gets such treatment but a petulant child born into privilege, never asked to mature?

Loved ones. I don't think we would tiptoe and hide the truth for a stranger, because we don't really care about hurting their feelings. It's a paradox, if you think about it - we hide the truth from the ones we love most, whereas it should be the other way around. Love should be epitome with sincerity.

Should we tiptoe?

Yes and no. As you said, these people are weak. They lack the strength to take what we tell them and use it constructively. Honestly, I think we tiptoe because we'd like to maintain a relationship with such people. Also, I think it's too late for some people...as I was saying, they've become too warped in their fantasy to be brought back to reality. They refuse to accept what we tell them as truth.
You've made me wonder why do I tiptoe? For the reasons above, yes, but should I? I shall have to think about it.