What if they are all little kids still throughout the entire game sleeping and dreaming what might happen in the future? They all grew up in the same place, maybe they are all having separate dreams and somehow they meld together. Think about that.

The whole idea of them all just happening to grow up together in the same place really put a halt to the story's credibility, imo. It does little good to speculate about a story that takes itself far too seriously considering its lack of logic. However, you do have an interesting take on it, which I never considered before.

I still think the theory that Squall is just dead makes how the story goes make more sense.