What you're seeing is the Shadow DOM polyfill and not native Shadow DOM. Under the polyfill, Polymer renders nodes you've defined in Shadow DOM as children of the element. There's no way to truly mimic the encapsulation features of SD. The polyfill does what it can.
To see native Shadow DOM, use Chrome Canary and turn on the "experimental web platform features" flag in about:flags. The good news is that when native Shadow DOM is available in the browser (very soon for Chrome, soonish for FF), Polymer will use it and your elements will indeed by encapsulated.
Background:
Chrome released an early version of Shadow DOM in M25. This has since been deprecated. It's quite possible that the early version of Polymer you're talking about is using the old API (webkitCreateShadowRoot
).