Removes the WordPress update nag that appears at the top of all admin pages when a new version of WordPress is released
In versions 2.5 and later of WordPress, your WordPress will alert you to the release of a newer version of WordPress via an update notice at the top of every admin page. WordPress 2.5 and later reports "WordPress X.X is available! Please update now!" or "WordPress X.X is available! Please notify the site administrator." See the screenshot for an example.
Maybe you know about the newer WordPress release (either from the nag, news, etc) and don't want to be constantly reminded by your current WordPress install (not everyone can or wants to upgrade to the newest version immediately). Also, you'd like to recover that much real estate on the page for something of more interest to you.
Within the context of your WordPress admin, the footer of your admin pages will reflect that status of your version of WordPress (be it current or out-of-date). And if you are tracking WordPress progress at all (i.e. blogs, forums, your WordPress dashboard) then you likely don't need to be made aware of new releases anyhow since you'll likely already know about them.
Most certainly not. The latest version of WordPress will contain the latest security and bug fixes, as well as new features. Backwards compatibility is of paramount importance to the project so in most cases you should be safe to upgrade (especially for minor releases). However, some people in special circumstances manage their sites in different ways for different reasons, which may preclude delaying an update to the latest version.