It is being declared righteous before God based on the merits of Christ. Often overlooked is the fact that when the Pharisee prayed he was thanking God. He was not saying how great he was by himself. He knew he was not able to do good works on his own, but felt that this infused righteousness he worked with justified him. God does indeed develop righteousness in everyone to whom He imputes righteousness, but we never achieve perfection in this life (Philippians 3:4-19). Works are the fruit, not the root of justification (Ephesians 2:10). This is the great danger, the teaching that the imparted righteousness whereby we can indeed do good works is the grounds of our justification, instead of the imputed righteousness of Christ to our account.
For some to justify means to make righteous rather than to declare righteous (cf. our sermon A Nail Pierces the Darkness). The Roman Catholic Church talks of grace and being saved by the merits of Christ alone. However, they teach that we receive the grace of God, and the merits of Christ, and are made righteous based on our participating in the sacraments of the church. Yet the Bible is clear that the gospel which saves the soul (1 Corinthians 15:1-4) does not include sacraments such as water baptism (1 Corinthians 1:17).
Also the Roman Catholic version of Communion (Eucharist) is turned into a righteous act on the part of the participant in which they maintain or continue their saving relationship with God. They believe that the real physical presence of Jesus is in the bread and wine and that it is the continuing sacrifice of Christ over and over to assist the participant in the continued removal of personal sin. The Bible is clear that this cannot be the case (Hebrews 9:24-28). The Bible clearly teaches that we receive the grace of God by faith alone, and not faith in any work, including a sacrament (John 5:24 / Romans 3:20-24 / Galatians 2:16 / Ephesians 2:8-9).
The difference is the difference between a saving faith that relies on an external atonement for sin and a misplaced faith that relies in an internal abatement of sin. We should be thankful that we have been given a measure of freedom from the power of sin in this life, but we must be careful to never equate this with our righteous standing before God.