Brake pad too low on rotor?
IMO, this is fine. I base that answer on the fact that I've been running Avid BB7s on Shimano Centerlock rotors and they are also too low, and in fact abrade down into the arms a bit. After thousands of (touring) miles, this has caused no braking issues nor even any perceptible pinging, etc.
There is more on this here.
If you put in a couple spacers, you'll of course have a little less pad grabbing the rotor. Whether or not it's sufficient braking at that point will be up to you to judge.