They can't just size it down because if they did, they'd be working with very few pixels and chances are you wouldn't be able to read the text in the overlay. Like trying to draw an 8 in a block of 6 pixels. They might have to rework the original games to run at a reasonable resolution for the overlay to look decent, but that doesn't mean the game will look any better.
Here, I just made a mockup on how it would look as-is. I took a screenshot from Abe's Exoddus and then took a screenshot of one of the overlay pop-ups from another game. It's actually not so bad as it is, but the popups could be pretty huge depending on your monitor. Exoddus runs at 640x480, so if you have another game that works with the Steam Overlay, set it to 640x480 and that's exactly how the overlay would look in the Oddworld games.
So really, it would be good enough as is... it just wouldn't look that great.