We didn't assume it is. Say you have a function of type (String -> String|Null). Further assume that you realize you don't necessarily need a String as input, and that you in fact are able to always output a string, no matter what. This means you can rewrite (improve!) the function such that it now has the type (String|Null -> String). Relaxing the type requirements for your inputs, or strengthening the guarantees for the type of your output, or both, is always an improvement. And there is no logical reason why you would need to change any external code for that. But many type systems are not able to automatically recognize and take advantage of this logical fact.
> > Several other null-safe languages [...] returning Y implies returning Y or Null.
> I have trouble seeing how the language is null-safe in that situation.
If you always assign a value of type Y to a variable of type Y|Null, the compiler will enforce a check for Null if you access the value of the variable, which is unnecessary (as the type of the variable could be changed to Y), but it can't result in a null pointer exception.