Ah, I see - I forgot about the anamorphic source, this project needed a lot more jiggery-pokery than I was giving you credit for!
Well, given what you're feeding the encoder (4:3 with anamorphic content) then yes, the encoder should be set to a 16:9 output - this won't change the pixel-by-pixel content (other than the effects of compression), but it will correctly flag the stream so the DVD player interprets it properly.
The DVD player is key here - if it's set up properly for the TV or projector it's being used with (and I realise that thousands probably aren't!) a 16:9-flagged source will display as 16:9 on a wide screen, or letterboxed on a 4:3 screen - everyone wins.