The name of an argument. Some languages (currently only PL/pgSQL) let you use the name in the function body. For other languages the name of an input argument is just extra documentation, so far as the function itself is concerned; but you can use input argument names when calling a function to improve readability (see Section 4.3). In any case, the name of an output argument is significant, because it defines the column name in the result row type. (If you omit the name for an output argument, the system will choose a default column name.)
This has changed in version 9.2. SQL functions can reference the name. Ergo:
s /(currently only PL/pgSQL) / (currently only PL/pgSQL and SQL)