1.) They mainly act to question the Hokage's decisions and suggest variant solutions. As being elderly, they do have extensive knowledge and probably some contacts in other villages. I believe they were both in Sarutobi's squad under the 2nd Hokage (so pretty aged). However, they really don't seem useful and too old fashioned in thinking (very Machiavelian). They never want Naruto as the Kyuubi jinchuuriki to leave the village, Uchiha massacre, involvement with Danzou, trading Neji's father for sacrifice, etc. They conceded to Tsunade after she physically assaulted them in the Nagato invasion arc. People are trying to move the ninja world forward, but they're holding it back.
2.) I think they need to be replaced by Shikaku and someone else. However the pickings are scarse due to people dying. The manga is heavily centered around the next generation, which is basically the Konoha 11's parents. It was Shikaku and some others like Ino's dad who were in command during the fight between Nagato and Naruto.
3.) I bet they can fight, but nowhere near the level of Danzou or Chiyo. Maybe regular jounin level with depleted chakra, but I bet they're clever like little rats.
4.) I say pull a Jurassic Park, and chain them up outside the Akatsuki base bushes for Sasuke to come and eat them like the T- Rex. It solves tons of problems. We'd get rid of the elders, see Sasuke's EMS, and everyone gets a good laugh in. O.O
