It needs more code

$ sudo gem update rails --include-dependencies

If you have RAILS_GEM_VERSION uncommented and set to a specific version of Rails in environment.rb, make sure that this is commented out, before aimlessly wandering about wondering why some new functions don’t work (like I did).

(Dave Thomas, author of Agile Web Development with Rails certainly has had his fair share of screaming when it came to getting people to upgrade)

You may want to just simply do:

$ sudo gem update --include-dependencies

(As new versions of capistrano/mongrel and others have been released too)