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Interpret footage and setting the PAR as you wish.
Without changing the laws of physics, you have hit on the two options.
Or; leave the 4:3 video as is and treat it as a PIP. Maybe even scale it down. When its impossible to hide something, sometimes the thing to do is make it more obvious.
Keep in mind also that you can move the scaled 4:3 image up or down to adjust framing.
They do this thing in television shows now and then. Use two copies of the 4:3 video. Make one full screen by zooming in, and then put a hefty blur on it. Then center the 4:3 clean image in the 16:9 frame.
If you do it often enough, it will look like you are doing it because you want to make an artistic point.