I'm not sure what you got going on there but you will probably be ok. I have a similar device on my sportworks rack. It is an extender. Both parts are 1.25" but i needed the extender on my minivan to clear the bumper. Just turned out that way.

Regardless, i have about 4" inside the receiver. Keep in mind that this is some very heavy guage steel and odds are you will be fine, even if it appears somewhat odd. I'm curious...how does that 1.25" piece fit inside the 2" piece? Can't tell from the pic.

What model of rack do you have?