Hi! I don't know if you have found a suitable solution yet, but you can try using DVD2SVCD. I just recall using this to convert DVD to SVCD with permanent subtitles a long time ago. The only way to have subtitles "burnt-in" to the video is through re-encoding if you want MPG output (program stream) only. Well, I just run a test with the updated version 1.2.3B1 DVD to DVD with selected permanent subtitle and it works perfectly. Note that this program makes use of popular encoders (CCE, TMPGEnc, Procoder, QuEnc), and their quality output is superb with the right settings. I used CCE OPV mode (1-pass) because I was just running a test on selected frames and the quality is still good as the original.
Give it a try and if you have general questions in using this software, let me know.