Nevermind that this policy necessarily means churn and undervaluing aspects of software like security or fault tolerance and a constant drain of institutional knowledge.
But I feel like this isn't very hard to understand and I don't know what you're not getting about it.
And if consecutively "meeting expectations" puts you near the bottom, then the expectation must actually be to exceed expectations.
Uh.. no.. you seem to think "meets expectations" necessarily means "will not get fired". This policy exists, as dumb as it may be. Imagine you're a manager at a company like this and you're tasked with giving a performance review. You have two choices: you could do what you seem to be implying they should go and fudge the ratings, so that the bottom 5% always get "does not meet expectations." Or you could say "fuck that stupid rule, I'm going to rate this person honestly, and if they still fire him that's their choice."
A performance rating and a company policy about firing are two completely separate things. I think you must have a naive understanding of how staffing decisions are made in the real world.
Because quality of the employee and the employee's work are not the only factors in hiring and firing decisions. Sometimes a smaller workforce is what makes sense, and if all your engineers are "meeting expectations", what are you going to do?