I could be wrong, and it doesn't really matter anyway, but I suspect part of the push against calling someone "retarded" is simply that it's poor English. To retard is to hold back, and the mentally defective haven't been held back at all. They simply can't progress because their brains are defective. So, they haven't been "retarded". They just don't have the ability to progress, and never will. Is that a challenge? Sure. So, you could call them "mentally challenged". But, that's not very accurate, either. I can challenge my brother to convert a decimal value to octal, or dereference pointers, or calculate trajectories. He can't do it, but it's not because he's defective. Far from it.
Same with "mentally disabled". That's wrong, simply because it implies the defectives were "able" in the first place, which isn't true. I'm mentally disabled, and I belong to Mensa. But, I had a severe brain trauma, so now my short-term memory doesn't work worth a tinker's damn and the left side of my body is substantially less coordinated than it was. Both those abilities used to exist, and now they don't due to defects in my brain as a result of injury.
Putting cutesy names on things doesn't help anyone at all. Mental defectives have dysfunctional brains, and that's all there is to it. It's sad, but that doesn't make it any less true.
