From my experience with outboards, the upper shaft O-Ring is there as a water slinger. Water can climb the spinning shaft, enter the spline, and wash the grease out. The grease is there to keep the male spline on the shaft from rusting into the female spline of the crankshaft. Or in this case, of the upper gearcase.
The above is my understanding of why the groove is there, so my Reason One to use it.
Reason Two? Playing "Let's outguess the Engineer" doesn't usually turn out as well as "Let's follow the Instructions."
If a practicing MerC Tech weighs in to the contrary, I would happily defer. There always could have been a service bulletin.