I only use saddles that are wider than the horse and then pad them so I'm sure to get the perfect fit even when the horse's body developement changes.
Never use a saddle that's too small. It's like with shoes. It gets too painful very soon.
The damage a narrow saddle can do are very extensive. To the point of severe lameness.
Think of it this way:
You want the saddle to fit your horse "like a glove".
Picture that you are trying on a pair of gloves, and one pair your try is too narrow for your hand. Do you add a slim pair of gloves underneath? - no, because that would make the gloves even tighter on your hand. Instead you try on the next size up. Your horse deserves that you do the same for him/her, in terms of a saddle.
You should not continue to use the saddle. Adding extra padding - no matter how soft/squishy or memory foam-like, will just add more pressure to your horses shoulders. If you add padding you horse will end up with sensitivity caused by pressure points and a sore back. The best thing you can do for your horse is purchase a saddle that fits him properly.
I agree with Brenna about those pads! At least for short time use a saddle that doesn't fit a horse is not a good thing it could hurt your horse and end up with really bad back pain. My friend did that with her horse and he still has back problems months later and he's only 5 so it's not from old age.