I don't believe this, but is it true that crocodiles never outgrow the pool in which they live?

If the crocs are in the wild they will get up and move to a larger pool when they out grow it. However if they are in an enclosure they will only grow to a certain size which will be determined by the size of the enclosure. Fish are also lke this. If the tiny tropical fish that one keeps in a tank were released back in to th rivers and lakes or put in much larger tanks they would also grow to be a lot bigger.

I can only think that this is a natural instinct that prevents them from outgrowing their living space and therefore dying.

Although this document refers primarily to caimans (specifically the spectacled caiman), information found here is applicable to all 23 crocodilian species.

5.1.6 Do caimans only grow to the size of their enclosures?

No, this is a myth. All crocodilians grow to be very large animals compared to many other reptile species. The idea that a caiman can be kept small if the cage is also kept small is a seriously flawed idea. Even in a small cage, a caiman will continue to grow until its movement is eventually hindered. Continued growth will result in deformed limbs, snout and tail as the body tries to increase in size naturally. This is extremely cruel and results in a stunted and unhealthy caiman with a seriously compromised lifespan.
http://crocodilian.com/crocfaq/faq-4.html#5.1.6