TW, if the engine will still run with the contact-breaker centre-screw shorted to the mag housing, then I think you're asking for trouble by not sorting it. The earth brush isn't doing its job properly. That could mean that the sparking plug return current is having to spark across one of the bearing insulators, which won't do it any good, and then pass from the bearing outer race to the inner race through the balls and grease between them, which in the fullness of time will wreck the bearing.
If you've got a multimeter that will measure resistance down to 1 ohm or less, then measure the resistance between the CB centre-screw and the mag housing. It shouldn't be more than about 10 ohms. If it is, do whatever you need to do to the earth brush and its spring to get the reading down to 10 ohms or less.
And once you've done that, you'll probably find your cut-out works again.
Best of luck,
Ken
http://www.brightsparkmagnetos.com