I bought new rear end rotors and pads for our '98 Legacy Outback and they literally will not fit in there. They are about 0.030" too thick. Not OEM. Could that be the problem? What is the fix for that? I can grind the pads down a tad, but that seems wrong to me. Is this normal? The piston is 100% all the way retracted.

 

???

cnc

If you got them from a walk in store take them back and check them against another set for your car. It wouldn't be the first time Autozone or the like have given wrong parts.  

not sure about 98, but there are 1 or 2 'transition' years where there is easy confusion on which brake equipment fits.

Are these original or stock/normal Subaru rotors? 

 

Highly unlikely it's the pads being too thick, try again?

 

How did you compress the caliper pistons?  On double piston calipers, one piston will compress more than another and press the other piston back out a little bit even if you have an old brake pad across it's face, so it's not fully compressed.  Depending what you're using you have to compress each piston a couple times. 

 

You're in seattle so rust isn't likely and issue but if the rotors have rust build up maybe they are keeping the pads too far out and increasing the overall pad/rotor/pad thickness. 

 

What exactly is happening?  Can you get the caliper started over the pads at all or it won't even start?

 

Google brake pad thickness for that vehicle and measure yours to compare.