This cross section of a Fender bullet trussrod might help with understanding what's going on here.
When it's properly seated and functioning correctly, the amount of 'bullet' nut protruding from the hole should always remain the same. Tightening the nut should apply tension to the rod and straighten the neck, but the nut itself shouldn't sink further into the hole when you tighten it (it just remains seated on the washer at the base). Typically about half of the nut should be visible. A bullet nut is 1" long, so about 1/2" should be showing, give or take a bit.
However, the area at the base of the nut, where the washer sits on a thin shoulder of wood, can be a weak point with tension trussrods of this type. Sometimes (particularly when being overtightened) the nut/washer can chew its way into the wood and sink further into the hole.
That's the main area of concern here. The nut in the 'after' pic in the first post does seem to be quite deep in the hole, which could indicate that it's started to chew its way into the neck. Most necks can tolerate a little bit of movement, but if it sinks too far into the neck, then the fretboard near the nut can buckle or crack. The block inlays on 70s basses, being cut into the fretboard, further weaken the wood in this area and exacerbate the problem.
It may or may not be what's happening with this particular bass, but a deep set bullet is a common symptom of the problem (or an impending problem down the line).