The smudge tool seems to be a good way to get a torn paper look.  Unfortunately, it's a very manual process.  I might be willing to use the smudge tool with a light pen, but I prefer an automated method since I only have a mouse.  These steps (which produced the above image) seem to be a reasonable, automated alternative:

1. Make an image with a single high contrast vertical edge.
2. Run the noise/slur filter with a high repeat value.  noise/pick also does okay, but it seems to be more likely to create holes in the paper.
3. Run gaussian blur with 0 vertical component.
4. That effect (shown above) is a bit blurry, so it might help to play with the curves at this point.

You can then use that image as a layer mask.  Adding a drop shadow completes the effect.