I don't know about what Paterno did. It seems like he just reported it up the Athletic Dept. chain and left it at that. That looks really bad, imo. Maybe that's all that is legally required, but, especially when it seems from reports that PSU more or less buried the situation, he may have had a moral obligation to do more (at least I think so).
I think Paterno should retire. The mediocre performance of the football team is one thing but this is much, much worse.
The bizarre aspect that makes me say this is that Paterno allegedly found out in 2002, when Sandusky was no longer associated with the program - why would you think this was a Penn State matter as opposed to a criminal matter? It makes it look like PSU covered up the incident and determined not to report it to the police. Why? Wouldn't you tell the GA to go to the police if that's what he saw? This whole thing fails the smell test.