The 32nd psalm in an exemplary psalm of instruction that teaches us what sin is, and how one might be freed from it and be righteous before God. Our reason does not know what sin is and tries to make satisfaction for it with works. But the psalmist says that even saints are sinners. The cannot become holy or blessed except by confessing themselves as sinners before God, knowing that they are regarded as righteous only from the grace of God, apart from any service or work.
In short, our righteousness is called the forgiveness of our sins. Or, as it says here: “sins not counted,” “sins covered,” “sins not to be seen.” Here stand the clear plain words: All the saints are sinners and remain sinners. But they are holy because God in His grace neither sees nor counts these sins, but forgets, forgives, and covers them. There is thus no distinction between the saints and the non-saints. They are sinners alike and all sin daily, only that the sins of the holy are not counted but covered; and the sins of the unholy are not covered but counted. One would have a healing dressing on and is bandaged; the other wound is open and undressed. Nevertheless, both of them are truly wounded, truly sinners, concerning which we in our books in other places have abundantly bore witness.
O God, our heavenly Father, with whom is grace and much forgiveness, be merciful to us who were born in sin and cannot but sin and fall short every day. Forgive us our many transgressions and account them against us no more, but make us Your heirs through Jesus Christ, Your beloved Son, who was delivered into death for our offences, and was raised again for our justification. Amen.
(from Reading the Psalms with Luther, pgs. 78-79)