I asked another applicant a similar question: "Suppose you wanted to send me a file with very sensitive information, how would you encrypt it in such a way that I would decrypt it?" The person started off by asking me if it was an excel file, a PDF, etc.
You should've answered the person, because then they might've told you that there's an encyption standard for PDF. I use it with my tax-preparer, so that we don't need to deal with other programs that would decrypt the file (and then potentially leave an unencrypted copy lying about).
Excel offers password protection to restrict modifications, it wouldn't surprise me if they offered encryption, too.
So in this case, it might not be that the person sucks at his job ... it might be that you are, because you had a pre-conceived notion of what the answer should be, rather than finding out how that person would handle the problem. It's entirely possible that they could come up with a better solution than yours.
And as for the the question of what proportion are bad ... you have to remember that you're hiring people. The people who really know what they're doing are likely either going to be paid well, or have an established network that they can tap when they need a job. (Rather than answer some random job posting where they don't know if it'll be worse than their past job, and/or have to jump through hoops answering poorly thought up interview questions).
If you mention to your current developers that you're hiring, and they can't manage to find people to refer, that's possibly a sign that none of them would be willing to subject their friends to come work for you. And if that's the case, you might have problems when one of their friends' companies are hiring.