I think it's appropriate to address the issue *precisely* at the
  point that kids start using the words inappropriately as terms
  of abuse.

  In the 3rd grade, they don't _know_ what gay or retarded means.
  They don't even _need to know_. [they'll figure it out by 4th or
  5th grade].

  But a kid that's called gay in the 3rd grade and doesn't know
  what it means... then later finds out what it means... can spend
  YEARS or DECADES of identity crisis issues..

  No, I think it's completely appropriate to be addressed. Will it
  be effective? Well, forbidden fruit as it is, probably not. But
  language matters. There's no innocent taunting and 3rd-5th
  graders can be VERY cruel to each other, as parents and teachers
  just brush it off as "childish". But these are future adults..
  and mental anguish starts right at the point of socialization
  with peers. I believe it is also the point to address gossip.
  Gossip leads to mean-girls. [among boys too - same behavior]
  and future cutters were once talked about behind their backs in
  3rd grade