The vast majority of kids in school who have reading difficulties are also under 11. But from time to time (in my experience, about 1 kid for every 4 school years, which at the level of student contacts I have works out to about 1 kid in 800) you meet a kid who reads only at a very elementary level - sounding out one word at a time, unable to sustain understanding of meaning while reading a sentence because of the difficulty of decoding individual words - in 9th or 10th grade. From time to time, a parent posts on MDC reporting a similar level of difficulty in an unschooled teen (who has not embarked willingly on the work required for remediation, or who has done so unsuccessfully). In this particular set of questions, these extreme cases are the children I am considering.
The pattern of responses that I am seeing here strongly indicates that, indeed, un-schooled children with severe reading difficulties that persist into the teenage years may be significantly socially isolated, as are their peers with similar reading difficulties in schools. To be clear, I don't think this is a problem with unschooling - kids with serious reading difficulties in schools are also socially isolated despite brushing shoulders with hundreds of other kids on a daily basis. The question then becomes, does the root of the social isolation lie within the children and their families, or does it lie in communities that would rather pretend everything is peachy and no problems exist?
Well, I have not met teens that cannot read but I do not deny they exist. My father could barely read - dyslexia - so I know they exist. Of course some (many?) people with dyslexia do read, but my father would be 78 if he were still alive, and I do not think there was much help for people with dyslexia when he went to school.
In any event, no learning system is a magic bullet. I think some kids with severe reading issues do better in school, some may do better at home. There are a lot of factors that could play into where they do better. It is also possible that for some kids it is not going to make a difference - they cannot learn to read due to a very severe disability in this area and coping skills/building up other skills becomes the way to go.
I cannot really answer to social isolation. I have heard people who cannot read often tend to hide this fact - is this what you mean? Or are they more likely to not engage with peers and their community? I can see either being the case as you age - it is Ok for an under 12 to not read in an USing friendly community (even in the world at large to a degree) but it must be embarrassing for teens and adults. Perhaps they find niches that are not reading heavy (physical activities as an example) but as that is not my niche I would not really know.