In terms of Graphics, probably the next generation will get about as much polygon pushing and texture quality, etc, that you could hope for.
However, games can always get better. More importantly, they can keep being different. Even if games were to reach some sort of height, you eventually will want to try new game styles of play. If you listen to Mozart enough, doesn't matter how great it is, your going to want to switch to some 70's rock for the sake of variety.
Since you talked about dropping 400 bucks, I assume you are talking about new platforms. Well, new games are worth getting a new platform, even if you don't need the better hardware. In addition, game developers are sure to come up with more uses for powerful hardware, above and beyond simple realism. So that will be worth it as well. Lastly, don't worry. New platforms cost money to design, and selling a new platform loses the big companies money. If they release a new console, it's because it is a big enough improvement over the previous to give a considerable edge over the competition. Why put forth effort to lose money on a new system if the old one is still cutting edge enough? I think we are reaching a magical time, where the next big technological leap won't be as valuable as game play innovation. With any luck, if you need to drop $400, it will be worth every cent.