Yes, she's a joke.

But you won't be laughing when/if someday she ends up President with the nuke codes on her desk.

Palin is not campaigning against the word. Rather, Rahm Emmanuel, the White House Chief of Staff (who, in general, has a reputation for cursing like a sailor), described certain political opponents as “retarded”, and Palin, whose son has Down’s Syndrome, criticized him for it. If you think Palin was purely motivated by compassion for the developmentally disabled and not at all by the fact that the person she lambasted hails from an opposing political party, then I have a bridge to sell you.

That's the set-up. The joke is that to fix this "problem", she is only going to adopt a "special needs" child who is also expected to die soon, thus negating the "problem" (that the child will still have "special needs" when you are 80), while being in our paradoxical cultural calculations even more praiseworthy than adopting a "special needs" child who is going to continue to be just as needy for much longer.

It can't really be parsed as mockery of "retarded people" unless you believe she was being earnest and sincere in her calculation and really believed what she was saying. She wasn't. She is a comedian.

How is that making fun of anyone? It's true, and people who actually take care of retarded children and adults have to come to terms with it. Who's going to take care of them when you can't anymore?

The shock comes from finding selfishness in something that isn't selfish at all. How many people would volunteer to take care of retarded children they don't know for even a day?