It's hard to tell from your photo whether your vintage tile is in good condition. Do you like the vintage feel and hope to keep the tile?
I would not install tile over tile. The soffit should go to expand the space within the shower. What's behind the door? A closet? Could you possibly expand into that space and add a tub/shower combo? That would mean demolishing the existing tub, but would give you more workable space and a separate walk in shower.

Thats pretty cute tile and looks great from here.

This tile is from the hospital where I work and I believe is the orginal from the built on addition of the early 50's. Looks great:
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Here is another view of this long used restrooom:
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I'm sorry I didn't answer your question. Just thought I'd share these photos.

Thanks Enduring--I do enjoy old bathrooms. I can't really say that just anywhere though. It comes out wrong. :)

Pipdog, thanks for the reply. I pretty much want to keep the bathroom as is. There is a linen closet behind the open door.

As far as tiling over, I mean above so that there isn't all that naked wall over the tub. Unless I can find some super duper extra water proof paint to put on the walls and ceiling, I don't think it should be showered in. It's a kid bathroom and they are still little so it's not a problem now but eventually it'll get some daily showering.

Just need to put something over the plaster that doesn't clash with the current tile. Plumbing upgrades are definitely in order.

I guess the dropped ceiling isn't that bad and might actually make a mismatched upper tile less visible.

And I want to add a back door.

So the important things to be done here are

1. waterproof walls and ceiling over tub (dropped ceiling removal optional)

2. regrout tile

3. add a back door

It doesn't really need to be remodeled--at least I don't think it does. But before I do sink some time and money into it, I want to be sure it's not beyond saving. Do I need to crawl under there and look for things? Knock holes in the walls and see if they are damp?

How do you know if a bathroom needs to be ripped down to the studs? (No points awarded for answering "if it's pink!")

That looks like the bath tub of the house I grew up in!

It's a really nice tub! =P

I had that exact pink and brown tile in my last house. I must have tried 10 different decorating schemes in there; the pink is hard to coordinate with. I ended up replacing the vanity and used plain white 4x4 tile on it. That looked okay, and might look okay over your shower surround. A little awkward, but okay.

I could also envision just using some sheet formica up there, well caulked; if you want to do something cool, get "boomerang" or some other 50s-inspired pattern and play up the kitsch factor.

I discovered that it was going to be a big challenge to replace the bath/shower fixtures (mine were brass, very corroded - ick!). It sounded like I would have to rip out tile to get to the valve and plumbing inner workings, as you can't just pop on new handles and tub spouts very easily. But you can replace the shower head relatively easily.

As far as figuring out whether it's structurally sound, I guess I'd go into the crawl space and try to inspect the floor under the tub and toilet. Poke at the wood with a screw driver and see what happens. If you replace your toilet, you'll have a chance to see if any horrors lie underneath - in mine, the subfloor was not in great shape (thanks to a previous owner who liked carpet in her bathrooms :) If you don't see rot, I would guess your bathroom will last a long time. I've read in the New York Times that tile from the 50s was made really strong. (I'm attaching a fun link you've probably already visited, but just in case...)

Here is a link that might be useful: Pink Bathrooms

I may have read it wrong.. but why would you want a back door out of (or into) a bathroom?

Playing up the "Kitch" factor as kmcg suggested:

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It looks like a lot of bath/shower combos from that era had tile about the same height. Shorter people then? If you put a good water resistant paint (is oil based any better than latex?) I wonder if you could add a rain showerhead so the splash is directed more downward? Then maybe you wouldn't have to add anything else above the tile?

I wonder if the soffit is utilitarian for pipes or???

I love the parrots. I wouldn't put them in, but I sure wouldn't take them out. :) After a lot of paint chips we decided that green goes well. We are thinking wallpaper. It's sort of a pinky tan more than a true pink and the usual blues and grays are bad with it.

I think this tub originally didn't have a shower so it really wasn't necessary to tile all the way up. I think I can access the plumbing through the linen closet. The toilet uses more water than I'd like but it's not going anywhere unless it has to. It's a classic. Hehe.

There shouldn't be anything in that soffit. This house just isn't that complicated. I think it was just the fashion of the day. And it doesn't bother me except that it's that much closer to the shower, so perhaps I could settle for waterproofing it.

I want an exterior door in the bathroom for convenient access from the swimming pool. The other option I've been considering is a small addition that includes a bathroom with a door out, but this seems like it would be simpler. Either way, I still need to waterproof the shower stall.

I read about waterproof membranes and things behind tile. What was used in the '50s behind tile?

Thanks y'all!

Zinsser Perma White is a water based mildew proof paint with a 5 year warranty. I've had it on the walls above my shower for 7 years with overspray and lots of condensation when the kids (mine are technically adults) forget to turn on the fan.... Still looks good as new. It can only be tinted to light or pastel colors. Highly recommended on the JB forum.

Thanks, for the rec, MMCF. I'll check it out.