They did, and looking back, the death variable in ME2 was something that ended up biting ME3 in the ass, one of the few things I consider to be a true flaw of ME2.
ME2 should have had mandatory character deaths for the SM: There are two ways I think this could have worked.
The more straightforward way would have been to just kill certain characters and have a certain outcome for the final mission in ME2. At least 3 to 6 of the characters would have a plot scripted death, plus members of the crew of the Normandy. That way, you don't overbook for the surviving characters in ME3, and you have them in assured positions of survival. IMO, these characters would be Thane, Samara, Zaeed, Kasumi, Jacob, and Grunt.
The second option for the SM is basically the same, with the difference being in 3 to 4 characters having a scripted death, and 1 choice with a variable squadmate death (as in you have the option to put 3 squadmates into one position, and whichever you pick dies.) Keep the crew deaths as variable depending on choices in ME2, like it already is.
And come ME3, you have the SM mechanic reinstalled for the endgame.