The population limit is dependent upon the specific model of PDA and has to do with available heap memory (not a bug). For most Palms the limit is 65. I agree that the message is confusing, and have put it on the list of things to look at for the Village Sim update.
You don't really need to worry about how many villagers you have. If you reach 65 villagers before the next puzzle happens, you will still be able to complete it. You will just have to wait for some more room in your village for new babies.
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Barbara
Unicorn
Last Day of Work