After hours of playing around with lots of trail and error I have a workaround.
I tried the turning off of the "reduce motion" option and that only made things worse. I was able to make the images smaller on the lock screen with this turned on.
I tried adding pixels to the image and that had zero effect.
In the end, I followed the advice of another poster on a different thread and downloaded InstaSize (iphone app). After I wrote my contact info on the picture with DoodleBuddy I opened the picture in InstaSize and reduced the image overall. Once that was done I shared it with the gallery, which saved it to the camera roll. From here I was able to set the picture as the lock screen image. It took a few tries to get the correct size in InstaSize, but it works!
I'm so not impressed with ios 7. Everything is harder to read, navigate, and it seems fluff takes up more space on the screen. The contrasting colors they picked for text to background are harder to read, especially on the fly. The text messages are annoying looking. I turned on the bold text just to read the app names! Grrr to Apple, I was so excited until I actually got to look at it myself.