I'm not offended by that, though considering I know what mentally retarded is, it shouldn't be a joke. It's one reason why I don't use the word "retarded" often. I once said in a class when the teacher said retarded, I said, "Retarded is such an ugly word," and one guy behind me laughed. I wasn't offended, but I was a little surprised by the laughter.
What's funny though is the word "special" on its own kind of bugs me. I find two kinds of negatives attached to special. First, it's often said in a condesending and pitiful way "Don't laugh at him, he's special." It's as if sometime in the past 50 years or so the definition of special has changed from "Different, better, and greater." to "Slow, fragile, needy, and retarded." secondly, I met some people my age who grew up with the self esteem movement who were told over and over again that they're special and they grew up believing that they somehow automatically deserve VIP treatment because they're special and not have to work for it like everyone else.