Dude, have you seen what kind of muzzle flash you get from an M38 or M44 Nagant, with a 20" barrel? A 16" 7.62x54R would probably throw a fireball as big as you. That surplus ammo has some pretty slow burning powder that does best in a barrel at least as long as the factory PSL one. If you must have a 16" barreled high powered rifle, the Saiga in .308 would be a better choice since it already comes in that length from the factory, and surplus .308 has a little faster burning powder, so you can tame that muzzle flash somewhat with a good flash hider.
Chopping the barrel on a PSL would just be more work that it's worth. It would also get rid of your front sight, unless you moved it back. All that work, and the PSL already costs more than the Saiga.