The FSM has me confused on this one. It says the "lip" should be 0.020 "max". The picture doesn't make any sense to me and why is it 0.020 "max"; am I supposed to believe the seal grows thicker over time?

I measured the thickness of the housing side surface and it's about 0.029-0.030. Is that good? What's the thickness of a new ring?

Let me demonstrate with some ASCII art. I measured the thickness between A and B where A is the housing side and B is the rotor side.

A
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[] B
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[]
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That measurement refers to the edge of the steel o-ring carrier that contacts the irons. What you measure is the shiney part of the edge. Fwiw, the 2 shims for the waterpump housing are 0.020 thick.