Jerry, from looking at the
www.mercurypartsexpress.com diagram for your motor's serial #, here's what I see:
Pc. # 31, "O-Ring, Rubber (Drive Shaft); more commonly known as a "slinger ring" and would slide all the way down to the water pump. About all it does is keep debris (sand, silt) from falling into the top of the pump.
Pc. # 32, "Seat Assembly"; as I recall on the earlier Three's this was a plastic piece with splines in it that slides down over the crank splines until it bottoms at the lower end of the splines. Or maybe there's no splines in this piece, just a 'tang' or something similar that allows it to bottom out on the driveshaft splines. This gives the next piece (#33) something to ride against.
Pc. #33, (Seal, Splined); This should be a rubber piece going on the end of the driveshaft. It does not enter the crankshaft splines, but rather, as you're installing the lower unit, gets "squished" up against the end of the crankshaft to seal that area, keeping water off the spring-loaded pin (as you surmised), and also (more importantly), keeping water out of the splined area so that the driveshaft won't rust into the crank, or even worse, the crank splines rot away (unlike the driveshaft, the crankshaft is regular steel).
This is what I recall, keep in mind they may have changed the way the sealing items 'stack up', however the goal is to keep water out of the crank splines. So, you've got to have something pliable (like a rubber seal) pressing against the face of the crankshaft.
It was a lot simpler in the Olden Days when there was just an O-ring up there but Merc had a Better Idea with this type of seal I guess!
Prior to installation, be sure you spread some waterproof bearing grease (or Mercury spline grease) on the driveshaft splines (but don't load up the top of the shaft, just a thin coat on the pin).
Anyway, that's my take on things, HTH...........ed
