His sister asking about getting the family together tells me that the "family" is going to handle dinner. I don't know why they'd expect you to pay when THEY are the ones organizing.
So, I'd respond with "DH would love to do pizza. It means a lot that you all want to do something for him! What can I bring? Cake, perhaps?" - or something to that end.
If they asked you about going out, I would think that they would pay for themselves. It's not like you invited them out and then said "Oh, you're on your own!" when the check comes.
I would assume (but I'm kind of an ass) that if they asked they would be providing the pizza. I would just ask "What can I bring?" and let it go from there.
I'd tell them that you already have dinner plans w/DH but you'll come over for cake & ice cream. Is making a cake & buying ice cream something you can work into your budget?
If they insist on dinner at their place just tell her, "A pizza dinner for 20 people isn't in my budget right now, but I can bring a cake." At that point they will either say that's fine or tell you that they're paying.
i think that your proposed response is a good one. there's a chance that your sil thinks that "just" doing pizza at her place is "cheap" enough that you'd pay for that too (or, rather, she's not thinking about the money at all if she's not in a place where thinking about money all the time is natural for her), so making clear in your response that you think she's providing is a good idea.
I think you should just be up front and say that pizza for 20 is out of your budget, but you would love to get together for cake and ice cream and see she offers to pay from there. That is a tough position to be in for you.
If you need to, you can be more direct- I'll bring cake and can throw in $20 to help cover some of the pizza. Thanks for hosting!
I hate being the poor ones too (the rest of them are poor, they are just irresponsible as well). I got used to telling people what we could do and letting them handle how they chose to deal with the situation from there. Being up front about your budget is always awkward at first but now I'm used to it and it makes things easier in the end. I grew up with discussing money being rude, but hey.