The Neutral switch does connect to ground when in Neutral. There is a little switch contact on the plunger detent that helps you "feel" for N with your toe. If the O-ring around the switch gets old and hard and shrinks some (most do), it leaks a bit and the Neutral light may never turn on because the switch moves upward by the shrunken O-ring depth. This prevents the contacts from touching.
On the other hand, if the epoxy seal around the plastic part of the switch has gotten brittle and cracked a bit, water seeps in by capillary action and partially shorts out the switch. This can make for a dim Neutral indication when you're not in Neutral.
If you use LED lamps, the slight leakage current thru the oil itself, between the contacts in the switch, can make an LED light up almost all the way when still in gear.
If water is getting in, consider giving it a good, hard, hot run for an hour or more to dry it out, then let it cool off 'till the next day. Get some clear epoxy and spread a bead of it around the original epoxy bead on the switch's lower face to help seal it off again. This usually works.
Of course, this is easier said than done, unless the engine is out on the floor somewhere.
