The problem for steel is that iron oxide is a flaky, porous material that can contain substantial amounts of oxygen, so that when it is sealed over with paint or whatever there is still a ton of O2 under the seal that can continue to rust the metal. Also iron oxide has a tendancy to flake off and take the sealant material with it, reexposing the rusting area.

That's why you need to remove all rust before repainting, to keep from trapping oxygen under the seal and to provide a firm base on which the paint can bond.

The good thing about rust on steel (unlike aluminum pitting) is the frame can be rusted very badly without becoming much weaker. You can see a bike covered in rust and once you have it cleaned off the bike is still in very good shape mechanically and structurally. Aluminum tends to pit right at the most important parts, and pits grow into the metal, while steel "general" rusting is a cosmetic, surface problem that takes a very long time to progress.