Putting that off was a good decision. It will be a while before the Falcon 9 program pays off its development costs, and spending an extra billion on R&D for an engine with no immediate market demand is risky and unnecessary. It could also put them too obviously in competition with the SLS, with potential repercussions to their CCDev program. If private industry was actively building an Apollo+ class rocket, some Senators would demand to know why NASA is duplicating the effort at vastly higher costs, and that wouldn't be a bit pleasant.
I'm sure some Merlin 2 designing still goes on unofficially, because rocket engineers can't stop playing around with their own ideas, even if they have to limit their efforts to break times, and because Elon knows he'll eventually need an engine that big if he's going to move to Mars.