The button graphical elements are made in Photoshop (you can also use pre-existing Encore menus), and then the layers are animated in AE or PPro. In Encore, you create subpicture-only buttons that overlay the menu with video background.
Instead, you create your menu video background in After Effects or Premiere Pro, import and apply it to your menu, and then set the menu Loop Point timecode to when the buttons appear in your video background.
Override is just a tool, and a widely misunderstood one. Buttons, menus, timelines, etc. all offer overrides- what it does is replace the end action of the targeted link. It used to be the only way to provide special-case navigation in Encore, before the advent of playlists and chapter playlists. With the advent of those mechanisms, override’s usefulness is less important. But it’s still a good tool to have- if you understand how it works.
TV sets overscan the video signal- not DVD players- resulting in cropping of the outer 10-20% of the image. There is nothing you (or Hollywood studios releasing DVDs) can do to change this behavior.
Prudent practice is to frame video for action-safe, and titles for title-safe. There’s nothing else that can be done.
Where was this MPEG-2 created? Have you had success importing other assets from the same source? If so, maybe the MPEG file is somehow bad- try re-exporting the file to MPEG-2. If the problem persists, try exporting the clip as AVI, and see if Encore handles that.